Bell Canada signage is pictured in Ottawa on Wednesday Sept. 7, 2022. The Federal Court of Appeal has rejected BCE Inc.'s request for a stay of a regulatory decision that will allow independent companies to sell internet services to their customers using its fibre network in Ontario and Quebec.THE CANADIAN PRESS/Sean KilpatrickSean Kilpatrick/The Canadian Press
BCE Inc.’s BCE-T dividend is in trouble: The telecom giant has been paying out more to shareholders than it is generating in profits, and some analysts have begun to float the idea that a cut to the quarterly distribution might be necessary.
But these aren’t compelling reasons to run from the stock.
Yes, dividend cuts leave shareholders with depleted income streams and they raise questions about a company’s strategic direction. Stocks with reduced payouts can be turfed out of dividend indexes and mutual funds if they no longer satisfy investment mandates, contributing to selling pressure that can weigh further on share prices.
But there are at least two solid reasons why investors can do better by embracing stocks with slashed payouts – including BCE, if it joins this group – rather than selling them when share prices are already depressed.
For starters, full disclosure: I own BCE shares. More importantly, I’ve written about BCE several times over the past couple of years, always with a bullish – and laughably incorrect – conclusion.
There was that time in 2022, when I calculated the superior returns investors can get after the dividend yield rises above 6 per cent. The share price has fallen 30 per cent since then.
Earlier this year, when BCE’s dividend yield neared the 8-per-cent threshold, I argued that the stock’s payout essentially matched the long-term average annualized performance of the stock market. BCE has since underperformed the S&P/TSX Composite Index by 47 percentage points.
And in September, I reported on the impressive historical returns among telecom stocks when interest rates are falling and dividends look more attractive next to bond yields. BCE shares have fallen 19 per cent since then.
Now, even BCE’s dividend policy is looking increasingly frail as the telecom wrestles with high debt and weaker profits. In early November, the company announced that it will acquire internet provider Ziply Fiber for $5-billion – and, in the same breath, said it is pausing dividend hikes.
Soon after, Desmond Lau, an analyst at Veritas Investment Research, published results from a survey that suggested most institutional investors think BCE should cut its payout, and by as much as 50 per cent.
This week, Maher Yaghi, an analyst at Bank of Nova Scotia, added his voice to the dividend skeptics, arguing in a note that the telecom should consider cutting its dividend if it is determined to expand into the U.S. or address intense competition in Canada.
So why stick with the stock if the dividend appears unreliable? Here are my two reasons for staying put.
One, sentiment may have hit rock bottom.
The collective wisdom of investors – reflected in a share price that has fallen to 13-year lows and a dividend yield that has risen above 10 per cent – is suggesting that the dividend, as we know it, is already toast.
Even a deep cut shouldn’t come as a surprise to investors, which means that the stock might be sitting near a low point. That’s never a good time to bail out. And if BCE doesn’t cut its dividend, you’re getting a very good payout.
The other reason to stick with BCE: Companies that have slashed their dividends can rebound.
JPMorgan Chase & Co. offers an ideal case. It cut its quarterly dividend in 2009, during the financial crisis, to 5 US cents a share from 38 US cents. The share price doubled within a year.
During the COVID-19 lockdowns in 2020, at least 10 high-profile Canadian companies – including Suncor Energy Inc., RioCan Real Estate Investment Trust and Sleep Country Canada Holdings Inc. – slashed their quarterly payouts to preserve cash when the economy was in freefall.
Within a year, this group of stocks was up more than 56 per cent and outperforming the S&P Dividend Aristocrats Index, which consists of stocks that have a history of raising their dividends every year, by 21 percentage points.
There are no insurmountable obstacles to a BCE rebound. Telecom is a stable, economically defensive sector. BCE is highly profitable with fat margins. It demonstrated in September, when it sold its stake in Maple Leaf Sports & Entertainment for $4.7-billion, that it can shed assets when it needs to.
And, if it decides to reduce its dividend, what’s not to like about a company with a sustainable payout and the enhanced financial flexibility to expand or beef up its competitive profile?
BCE’s recent performance has been awful, but the looming threat of a dividend cut hardly seems like the ideal time to call it quits on the stock.