Canadian telecommunications giant BCE Inc. announced Thursday that it is cutting its quarterly dividend payment for the first time since 2008 as it deals with “intense price competition and sustained regulatory uncertainty” amid a “backdrop of macroeconomic and geopolitical instability.” The more-than-50-per-cent cut was not unexpected by investors, but was nonetheless a dramatic development for a company that has been a reliable member of the “dividend aristocrats” club for year. Here, the Financial Post looks at the motivation for the cut and what it means for the telecom giant going forward.
What happened?
In a first quarter earnings report released on Thursday, BCE said it would reduce its
from 99.75 cents per share to 43.75 cents per share. As a result, BCE’s annualized dividend will also fall to to $1.75 per share from $3.99 per share.
The company said it made the decision to address pressures in its economic and operating environments that have been building since the fall of 2024, including heightened economic uncertainty, inflationary pressures, global recession fears as well as what it called an “unsupportive regulatory environment,” singling out “recent CRTC decisions, ongoing aggressive competitive pricing and a slowdown in immigration.”
BCE chief executive Mirko Bibic said on a call with analysts that the move will help the company optimize its balance sheet and cost of capital, accelerate deleveraging and give it the flexibility to invest for growth.
“It’s incumbent on us to continue to grow this franchise and then deliver total shareholder returns to our shareholders by being a sustainable dividend-paying company,” he said.
How unusual it is for BCE to cut its dividend?
Thursday’s move marked the first time in 17 years that BCE has reduced its dividend. The company suspended dividend payments for two quarters in 2008 as it worked to close a $52 billion leveraged buyout deal to a consortium led by the Ontario Teachers’ Pension Plan and U.S. private equity firms. However, the deal ultimately collapsed after auditors determined adding $34 billion in debt to take the company private would threaten BCE’s solvency.
Operating as Bell Canada, the company paid its first dividend of 50 cents on Jan. 16, 1950. The company reorganized in 1983 to form Bell Canada Enterprises Inc. (later shortened to BCE Inc.) and started trading on the Toronto Stock Exchange on April 28 of that year. Before the 2008 freeze, BCE had consistently paid dividends to shareholders every quarter since 1950.
Someone who bought one share of Bell Canada
in January 1949 at its average selling price of $39.96 would after splits and consolidations now own about 5.5 shares of BCE Inc. (worth about $31.75 each or $174.62 total) and along the way would have been paid dividends totalling approximately $540. They also would have picked up shares of Nortel Networks and Bell Aliant along the way, when BCE distributed those holdings to existing shareholders in 2000 and 2006, respectively.
Why is the cut important?
BCE has been one of Canada’s most reliable dividend payers over the years and has become a stalwart in funds dedicated to dividends. For example, it is currently the largest holding in Blackrock’s iShares S&P/TSX Canadian Dividend Aristocrats Index ETF.
Stocks like BCE are sometimes classified as “widows and orphans” stock, meaning they pay high dividends with low volatility and are suitable for low-risk investors looking for steady income. Utilities, banks and consumer staples often fall under this category, also called “defensive” stocks, for their ability to weather market swings and economic downturns.
But challenging market conditions have tarnished BCE’s shine recently. The company’s dividend payouts have far exceeded the company’s target range of 65 per cent to 75 per cent of free cash flow in recent years. The company’s dividend payout ratio was 108 per cent at the end of 2022, 111 per cent at the end of 2023 and 125 per cent at the end of 2024. The unsustainability of that situation is in part why the shares have fallen 31 per cent in the last year.
Though it’s reputation for sustained dividend payouts has taken a hit, Bibic pointed out that even after the cut, BCE has one of the highest dividend payouts of companies that trade on the S&P/TSX 60 index.
What is the outlook for BCE stock going forward?
The decision to cut the dividend came as no surprise to analysts, who widely predicted the company would need to make such a move. It appears the move was already priced in, as BCE shares rose both Thursday and Friday following the announcement.
Going forward, the company has updated its dividend payout policy to target a dividend payout range of 40 per cent to 55 per cent of free cash flow.
As of Friday, Bloomberg’s survey of analysts showed three buys, seven holds and six sells.
Cutting its dividend will put BCE in a better position and give it more “wiggle room” with its free cash flow, said Robert Gill, portfolio manager at Fairbank Investment Management Ltd.
“They can re-address their capital structure, they can reduce debt, they can still offer a very impressive dividend yield for shareholders without it being irresponsible, and they can invest in growth,” he said.
While the dividend cut may bring some volatility if there’s turnover in BCE’s shareholder base, Gill said it’s still an attractive stock for investors to keep their eye on. If growth picks up and that’s reflected in BCE’s quarterly performance numbers, “you’re going to have a shareholder base that gets pretty excited pretty quickly,” he said. “It’s one of the most widely held companies in Canada and it has been for a very long time. People know it. It’s got a very strong brand. There’s a lot of credibility associated with it.”
Will dividend funds be forced to sell?
It depends on the specific methodology of the fund, said Gill. For example, so-called “aristocrat” dividend funds generally hold stocks with a track record of consistently increasing dividends for a certain consecutive number of years.
“Once you stop moving higher, you can no longer be included in that aristocrat fund,” he said. “However, you can continue to be included in dividend funds, and there are a lot more dividend funds than there are dividend aristocrat funds.”
Gill said
aren’t focused on a continual increase in dividend payouts, but the overall total yield.
“You could have a company in a dividend aristocrat fund that pays one per cent and they’re going to increase it to 1.1 per cent next year, but most retail investors would rather own BCE paying six per cent plus,” he said.
• Email: jswitzer@postmedia.com
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