Down 39%, Is BCE Stock a Buy at its Whopping 9% Yield?

BCE Inc (TSX:BCE) is Canada’s highest yielding large cap dividend stock. Boasting an 8.9% yield (roughly 9%), it pays out massive amounts of income… assuming that the current payouts can be sustained. Although BCE’s yield is massive, its earnings trend is negative, and its payout ratio (percentage of profit paid out as dividends) is above 100%. If this situation persists much longer, then BCE will have to cut its dividend payout, as U.S. telcos did before they finally started turning things around last year.

U.S. Telcos: An instructive case study

To see what the future has in hold for BCE, we can look at two comparable U.S. telcos that previously struggled through what BCE is going through: AT&T (NYSE:T) and Verizon (NYSE:VZ).

Both companies hit rock bottom prices last year, only to turn things around when a series of earnings releases showed them getting back to positive growth in earnings, sales and free cash flow, after years of negative growth. There were several reasons why T and VZ struggled in the years leading up to 2023. One, the rollout of 5g necessitated massive infrastructure spending. Two, the COVID-19 pandemic resulted in many sporting events being shut down, diminishing a major subscription driver. Third and finally, 2022’s interest rate hikes increased the two companies’ interest expenses.

These events resulted in a few tough years for AT&T and Verizon. However, in the later quarters of 2023, the two companies started gaining subscribers, and their revenues and earnings went up. Their stock prices increased accordingly.

Could the same thing happen to BCE?

It’s a mixed picture. Although BCE is a beaten down telco like AT&T and Verizon were, its earnings trend remained negative in the most recent quarter. That won’t instill a lot of confidence in investors if it persists. Also, AT&T and Verizon traded at single digit P/E ratios at their lows. BCE still costs around 14 times earnings. It may have further to fall before it achieves the turnaround that U.S. telcos did.

Canadian telcos “well-protected”

Despite facing some headwinds, BCE has one thing going for it: it is “well protected.” Canadian regulators generally don’t allow much competition in the telco space. This fact tends to result in a lot of moaning about prices from consumers, but it does pad investors’ wallets. Or, at least it padded their wallets in the past: the last few quarters were not so great.

Due to the relatively minimal amount of competition it faces, BCE should turn things around eventually. In most markets, it faces only two or three competitors. Where I live, Bell and Eastlink are the only internet providers in town! It’s not the most competitive market in the world, which bodes well for BCE’s fortunes.

Foolish takeaway

Taking everything into account, I think that BCE should do fine in the long term. Its immediate prospects are dimmer. If BCE follows the trajectory that AT&T and Verizon did, then it will have to cut its dividend and go through more painful quarters before it turns things around. If the Bank of Canada makes good on the interest rate cuts it’s been hinting at, then maybe things will turn around faster than I expect.