When analyzing stocks, not everything is black and white. Companies evolve, and sometimes a stock can look great but have problems underneath the surface. Other times, there can be real issues in a business, but there are signs of improvement if you know where to look.
The same can be said about a dividend safety rating. SafetyNet Pro looks at a company’s cash flow, its history and its likely future financial performance.
But the rating it gives is a snapshot at a particular time. As results improve or deteriorate, so can the rating.
That’s the case with BCE (NYSE: BCE). The Canadian telecommunications company has a juicy 5.5% yield.
When we look at the SafetyNet Pro rating, it’s not a pretty picture.
Last year, it paid out 80% of its free cash flow in dividends. This year, projections are that BCE’s payout ratio will be 78%.
Both of those figures are slightly above my comfort zone. Generally, I like to see a company pay 75% or less of its free cash flow in dividends. That way, if free cash flow slips, the company can still afford to pay the dividend.
So it’s possible that if free cash flow comes in just a little above expectations in 2018 and the payout ratio dips to 75% from the expected 78%, the stock could get an upgrade.
And if free cash flow increases again in 2019, that’s another opportunity for an upgrade.
Lastly, BCE is penalized for briefly eliminating its dividend in 2008. BCE did not pay a dividend in the June or September quarters of that year.
Interestingly, when BCE resumed the dividend payments in December 2008, it paid the same CA$0.365 dividend as it had before it stopped paying shareholders. And the following quarter, management raised the dividend, starting a 10-year streak of annual increases in which the payout has been raised 14 times to the current CA$0.755.
Companies with dividend cuts in the past 10 years receive an automatic downgrade from SafetyNet Pro. Even if everything else is perfect, a dividend cutter cannot get an A rating. Once that dividend cut occurred more than 10 years ago, all is forgiven.
So next year when BCE’s dividend reduction ages out, there will be an automatic upgrade.
BCE’s current dividend safety rating is low because of the payout ratio and the temporary elimination of the dividend in 2008. But those things could change significantly in the coming year. I would not be surprised at all (in fact, I expect) to see BCE’s dividend rated “safe” this time next year.
At this moment, however, the rating is not strong.
Dividend Safety Rating: D
If you have a stock whose dividend safety you’d like me to analyze, leave the ticker in the comments section below.