It Might Not Be A Great Idea To Buy BCE Inc. (TSE:BCE) For Its Next Dividend
It looks like BCE Inc. (TSE:BCE) is about to go ex-dividend in the next four days. You can purchase shares before the 14th of December in order to receive the dividend, which the company will pay on the 15th of January.
BCE's upcoming dividend is CA$0.83 a share, following on from the last 12 months, when the company distributed a total of CA$3.33 per share to shareholders. Looking at the last 12 months of distributions, BCE has a trailing yield of approximately 5.8% on its current stock price of CA$57.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether BCE can afford its dividend, and if the dividend could grow.
Check out our latest analysis for BCE
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. BCE distributed an unsustainably high 130% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (72%) of its free cash flow in the past year, which is within an average range for most companies.
It's good to see that while BCE's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see BCE's earnings per share have been shrinking at 3.2% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, BCE has lifted its dividend by approximately 7.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. BCE is already paying out 130% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Is BCE an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Additionally, BCE is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of BCE don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for BCE (of which 1 can't be ignored!) you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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