Canadian telecom giant BCE Inc (TSX:BCE)(NYSE:BCE) pays investors a mouthwatering dividend that yields around 12% per year. That’s a massive payout as many stocks don’t even offer yields of more than 5%, let alone 10% and higher.
At this high of a rate, investors should be asking questions about the payout. That’s because if it was truly safe, many investors would be rushing to buy BCE for such a high dividend but the fact that they aren’t and that the stock continues to fall, suggests there’s plenty of risk here.
Let’s start with the obvious: BCE’s earnings simply don’t look strong enough to cover the dividend in the first place. The company’s quarterly dividend is about $1.00 per share and over the past four quarters, the highest per-share profit BCE recorded was just $0.59 – nowhere near enough to support that payout. Without a significant improvement in the bottom line, it may just be a matter of time before BCE opts to trim the dividend.
Another issue is that BCE looks to be focused more on expansion these days. Last year, it announced plans to acquire U.S.-based Ziply Fiber for $5 billion. If BCE is going to be using resources to fund growth initiatives in the U.S. market, then it may need to divert some cash away from its dividend.
Overall, I believe a dividend cut is coming for BCE, and it’s just a matter of when. Its earnings don’t look great and spending money on growth opportunities in the U.S. suggests to me that the writing is on the wall — investors should brace for a dividend cut sooner rather than later.
