Readers hoping to buy BCE Inc. (TSE:BCE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase BCE's shares on or after the 14th of September, you won't be eligible to receive the dividend, when it is paid on the 15th of October.
The company's upcoming dividend is CA$0.88 a share, following on from the last 12 months, when the company distributed a total of CA$3.50 per share to shareholders. Based on the last year's worth of payments, BCE stock has a trailing yield of around 5.2% on the current share price of CA$66.71. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. BCE distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 93% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Cash is slightly more important than profit from a dividend perspective, but given BCE's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that BCE's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, BCE has increased its dividend at approximately 6.7% a year on average.
To Sum It Up
Is BCE worth buying for its dividend? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (115%) and cash flow (93%) as dividends. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that in mind though, if the poor dividend characteristics of BCE don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 3 warning signs for BCE that we strongly recommend you have a look at before investing in the company.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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