Do investors have reason to beware of the 5.3% dividend yield of BCE Inc. (TSE: BCE)?

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<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Is BCE Inc. (TSE: BCE) a good dividend share? How can we say it? Dividend-paying companies with growing profits can be very worthwhile in the long term. If you want to make a living from dividend income, it is important that you invest much more rigorously than the average investor. "Data-reactid =" 27 "> Is BCE Inc. (TSE: BCE) a good dividend stock?" How can we judge that? Dividend-paying companies with increasing profits can be very worthwhile in the long term. If you want to make a living from dividend income, it is important that you invest much more rigorously than the average investor. "

A high return and a long history of dividend payments are an attractive combination for BCE. We would guess that many investors bought it for income. A simple analysis can reduce the risk of thinking BCE is its dividend, and we'll focus on the most important issues.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Click on the interactive chart for a full dividend analysis "data-reactid =" 29 "> Click on the interactive chart for a full dividend analysis

TSX: BCE historic dividend yield, January 4, 2020

payouts

Dividends are usually paid out of company profits. If a company pays more dividends than it deserves, the dividend can no longer be sustainable – hardly an ideal situation. For this reason, we should always check whether a company can afford a dividend, measured as a percentage of consolidated earnings after taxes. Last year, the BCE paid out 95% of its profit as a dividend. This is a fairly high payout ratio, suggesting that the dividend is not well covered by the result.

In addition to comparing dividends to profits, we should check whether the company has generated enough cash to pay its dividend. The BCE paid out 76% of its cash flow last year. While this may be sustainable, it does not leave a large buffer for unexpected circumstances. It is good to see that while BCE's dividends were not well covered by earnings, at least from the perspective of free cash flow, they are affordable. Even if the company continued to pay out almost all of its profits, we would be concerned about whether the dividend in a downturn is sustainable.

Is BCE's balance sheet risky?

Since the BCE dividend was not well covered by the profits, we need to review its balance sheet for signs of a financial emergency. The financial situation can be checked quickly with two key figures: net debt divided by EBITDA (earnings before interest, taxes, depreciation and amortization) and net interest coverage. Net debt to EBITDA is a measure of a company's total debt. Net interest coverage measures the ability to make interest payments. In essence, we are checking that a) the company does not have too much debt and b) can afford to pay the interest. With a net debt that is 2.61 times EBITDA, BCE has a noticeable debt. However, if the business remains stable, it may not be particularly worrying.

Net interest coverage can be calculated by dividing earnings before interest and taxes (EBIT) by the company's net interest expense. The BCE considers the net interest coverage of 5.07 times its interest expense to be appropriate, although we are aware that even a high interest coverage does not make a company bulletproof.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We update our data on BCE every 24 hours you always get You can find our latest analysis of the financial situation here."data-reactid =" 48 "> We update our data on BCE every 24 hours so that you always get our latest analysis of the financial situation.

Volatility of the dividend

Before we buy a stock for its earnings, let's check whether dividends have been stable in the past and whether the company can demonstrably maintain its dividend. BCE has been paying dividends for a long time, but for the purposes of this analysis, we only examine the last 10 years of payments. The dividend has been reduced by more than 20% at least once in the past. In the past decade, the first annual payment in 2010 was CA $ 1.54, compared to CA $ 3.17 a year earlier. The dividend per share rose by around 7.5% per year during this period. The dividends have not increased by exactly 7.5% each year, but this is a useful way to find out the historical growth rate.

Dividends have risen reasonably, but with at least a significant reduction in payments, we are not sure whether this dividend share would be ideal for someone who wants to make a living.

Growth potential of the dividend

With a relatively unstable dividend, it is even more important to assess whether earnings per share (EPS) are increasing. It's not worth taking the risk of a dividend cut unless you are rewarded with higher dividends in the future. Revenue has risen 5.4% per year for the past five years, which is better than seeing it shrink! Although earnings per share are growing at a credible rate, almost all earnings are distributed to shareholders as a dividend. This is fine, but it can limit the growth of the company's future dividend payments.

Conclusion

In summary, shareholders should always consider whether BCE's dividends are affordable, whether dividend payments are relatively stable, and whether they have good prospects of increasing their profits and dividends. We are somewhat dissatisfied with its high payout ratio, although at least the dividend was covered by free cash flow. Unfortunately, earnings growth was also mediocre and the company has cut its dividend at least once in the past. Given this information, we may not consider BCE an ideal dividend stock.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Companies that increase profits are usually the best dividend stocks in the long run, see what the 17 analysts we track forecast for BCE free with the public Analyst estimates for the companyEmagazine.credit-suisse.com/app/art…1007 & lang = DE Companies with rising profits are generally the best dividend stocks in the long run. See what the 17 analysts we see forecast for BCE free with public analyst estimates for the company.

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We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 62 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.