From Today's Globe and MailTo cut or not to cut the dividend? That is the question for BCE Inc. Irene Galea Published Yesterday. Updated 1 hour ago
BCE Inc.’s stock has long been valued by Canadian investors for its rich dividend and regular increases. But some institutional investors say the company should make the difficult decision to cut it – by as much as half.
Last month, BCE said that as part of its plans to acquire U.S.-based fibre internet provider Ziply Fiber, it was putting dividend hikes on hold at an annual payment of $3.99 for all of 2025, and instituting a dividend reinvestment plan (DRIP) to help fortify its balance sheet.
The deal triggered a critical reaction among analysts, who noted that the company would likely need to spend heavily for Ziply to build out its network. That, combined with the dividend pause sent BCE’s share price tumbling.
Now, some investors say BCE needs to rethink its dividend strategy. The problem: BCE is distributing more cash than it is generating in free cash flow.
BCE paid $910-million in cash dividends for common shareholders in the third quarter, exceeding the company’s free cash flow of about $832-million. The company’s per-share quarterly dividend of about $1 also exceeded its adjusted earnings per share of 75 cents in the quarter. Earlier this year, The Globe and Mail reported that the company’s 2023 dividends were 162 per cent of reported net income, the fourth straight year above 100 per cent and the 11th straight year above 80 per cent.
A dividend cut would be unpopular. The market’s displeasure with the pause to dividend-rate increases has remained clear: As of Wednesday, BCE’s share price on the Toronto Stock Exchange was down nearly 30 per cent year-to-date, with a near-record yield of 10.65 per cent. A dividend cut could send the stock tumbling further.
Nonetheless,
24 institutional investors surveyed by Veritas Investment Research overwhelmingly say the company should bite the bullet. Of those surveyed, 83 per cent said the company should reduce the dividend. More than half of those unnamed investors said the dividend should be reduced by
at least 50 per cent. “While that magnitude of a cut is massive, it makes complete sense to us,” noted Veritas analyst Desmond Lau in a report on the survey. “Ironically, instead of acting as a buoy for share prices, the unsustainable dividend is an anchor weighing the stock and company down. In our view, a cut is the right move for the long term.”
By Veritas’s calculation, cutting the dividend by 50 per cent would result in about an 80-per-cent payout ratio. While still “on the high side,” Mr. Lau said, this would give the company some flexibility for debt reduction and share repurchases.
Institutional investors were split on whether such a move would result in a share price drop. Forty-eight per cent expected it would send the stock lower, but 52 per cent said it would either increase or remain the same, given that the company’s share price has already dropped to its lowest point since 2011.
BCE Inc. spokesperson Ellen Murphy said the company intends to pause dividend growth until the payout ratio and net debt leverage ratios are tracking toward the company’s target policy ranges, noting the importance of cash generation for investors. In its 2023 annual report, the company states a target dividend payout range of 65 to 75 per cent of free cash flow.
“We have been transparent and consistent that our dividend payout ratio would be elevated for a period of time, especially as we accelerated investment in long-life fibre infrastructure that is and will continue to be a strategic differentiator for the company,” Ms. Murphy said in an e-mail.
When BCE announced the Ziply deal, chief financial officer Curtis Millen said the company expects the payout ratio to fall beneath 100 per cent on a pro forma basis. Bell defines its payout ratio as dividends paid on common shares divided by free cash flow.
But Mr. Lau says the company’s calculations do not take into account certain lease costs and other factors. When calculated this way, he said, this would result in a payout ratio of more than 150 per cent in 2027, or 120 per cent if excluding capital expenses related to Ziply.
“What it comes down to is, ultimately, whether management’s belief that the dividend is sacrosanct and should be protected at all costs really makes sense, and if that is even something that’s desired by the shareholders who essentially own and control the company,” Mr. Lau said.