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Gordon PapeGordon Pape • 3rd+ • 3rd+ Acclaimed Author and Editor of Canada’s Most Highly Regarded Investing NewslettersAcclaimed Author and Editor of Canada’s Most Highly Regarded Investing Newsletters 1w •

1 week ago

 

 

 

Regular followers may recall that in my last post, I featured part of a Q&A that was recently published in The Globe and Mail. In it, I promised to share another one and here it is, courtesy of Geoff O.

“I own Enbridge (ENB-T) and BCE (BCE-T). I see they don’t earn enough income to cover their dividends. Consequently, there are no retained earnings, and the deficit continues to grow.

“As investors, should we flee these situations? Or are these companies large enough to run deficits for several years with little consequences?”

And here’s my response.

“I wouldn’t flee these stocks (I own both), but I’d monitor them closely and take nothing for granted.

“BCE currently yields 8.8 per cent, which is clearly a red flag. The company recently had its credit rating cut by Moody's and the announced sale of its stake in MLSE (Maple Leaf Sports & Entertainment Partnership) to Rogers Communications for $4.7 billion did nothing to boost the share price.

“Third quarter results will be released Nov. 7. In the second quarter, BCE reported adjusted earnings per share of 78 cents, well below the quarterly dividend of 99.75 cents. The company guided to full year adjusted EPS of a decline of 2 to 7 per cent drop below that of 2023.

“But BCE doesn’t calculate its dividend payments on earnings. It uses free cash flow as its base, saying: ‘Free cash flow shows how much cash is available to pay dividends on common shares, repay debt, and reinvest in our company’.

“Second quarter free cash flow was $1.097 billion. BCE has 912.3 million shares outstanding. On that basis, the total cost of dividends in the second quarter was $910 million. That’s 83 per cent of free cash flow. There’s not much wiggle room there and very little left over for debt reduction and reinvestment.

“Enbridge pays a quarterly dividend of 91.5 cents or $3.66 a year, to yield 6.5 per cent. It’s Q2 adjusted earnings per share was 58 cents, again well below the payout.

“Base business distributable cash flow was $2.798 billion. The company had weighted average common shares outstanding of 2.137 billion which works out to a total dividend cost of about $1.96 billion. That’s a better position than BCE, and Enbridge’s lower yield reflects that. But continue to keep a close eye on both situations.”

Over the years, I’d hazard a guess that I’ve received thousands of questions from subscribers to the Globe and my popular investing newsletters, Internet Wealth Builder and The Income Investor. I do my level best to answer each and every one of them.

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