Moody’s Ratings downgraded BCE Inc.’s
credit rating Friday to the last level above junk-bond status, citing the company’s high debt levels and limited ability to improve the situation.
Moody’s also downgraded Bell Canada, BCE’s major operating subsidiary, to a rating two notches above junk, also known as “non-investment grade.”
Credit ratings help debt investors assess the risk of loaning money to a company. Lower ratings often force a company to pay higher rates on its borrowings to offset that risk.
Analyst Peter Adu said Bell Canada has consistently increased its ratio of debt to profits since 2019 “and has not demonstrated any commitment to deleveraging while maintaining a dividend growth model, which raises governance risk and is a factor that drives the rating downgrade.”
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BCE has a long-term commitment to boosting its dividend, having raised it for 16 straight years. Dividend growth was 5 per cent a year for a decade through 2023.
In the conference call discussing the company’s 2023 results, chief executive officer Mirko Bibic called it an “unwavering commitment to dividend growth. Dividend growth remains central to our value proposition, and we’ll continue to prioritize it in our capital allocation.”
Those results, however, prompted questions about the feasibility of the plan. The company has been spending heavily on upgrading its networks, and weak results in the telecom sector have weighed on profits and the cash flow needed to pay shareholders. The dividend was increased just 3.1 per cent for 2024, a slower growth rate. Currently, BCE’s dividend yield is about 8.5 per cent, a high payout even among dividend stocks.
According to S&P Global Market Intelligence, BCE’s dividends exceeded the company’s free cash flow – an estimate of cash flow after capital expenses – in seven of the past nine years, including a 130-per-cent payout rate in 2023.
By S&P’s count, BCE has generated $25.8-billion of FCF since the end of 2012 and paid $29-billion in common dividends. BCE’s debt stood at $39.5-billion at June 30.
BCE uses different calculations for its dividend payout ratio, but has said its past two payout rates were 111 per cent in 2023 and 108 per cent in 2022.