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We Wouldn't Be Too Quick To Buy BCE Inc. (TSE:BCE) Before It Goes Ex-Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BCE Inc. (TSE:BCE) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 13th of September in order to be eligible for this dividend, which will be paid on the 15th of October.

BCE's upcoming dividend is CA$0.79 a share, following on from the last 12 months, when the company distributed a total of CA$3.17 per share to shareholders. Based on the last year's worth of payments, BCE stock has a trailing yield of around 5.0% on the current share price of CA$63.54. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See 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 paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether BCE generated enough free cash flow to afford its dividend. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while BCE's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

TSX:BCE Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at BCE, with earnings per share up 5.0% on average over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, BCE has lifted its dividend by approximately 8.1% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is BCE worth buying for its dividend? While earnings per share have been growing slowly, BCE is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious what other investors think of BCE? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.