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1 Stock to Steer Clear of

Caution, careful
Image source: Getty Images

Written by Tony Dong, MSc, CETF® at The Motley Fool Canada

I’m primarily an exchange-traded fund (ETF) investor, as I prefer the simplicity and broad market exposure they offer over the intensive research required to pick individual stocks.

However, while identifying the next big winner can be challenging, spotting potential trainwrecks is often more straightforward for me. One stock on the TSX that I would advise caution with is BCE (TSX:BCE).

Despite its prominent status in the telecommunications sector, there are several reasons why I believe investing in BCE for dividends could be risky. Here’s why I would steer clear of it for the foreseeable future.

It’s addicted to debt

As quasi-utilities, telecom companies are typically burdened with high levels of debt due to their capital-intensive nature.

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However, BCE’s financial profile raises particular concerns. The company has consistently prioritized boosting its already high dividend yield, often at the expense of its financial health.

Currently, BCE’s forward annual dividend yield stands at an enticing 8.52%. While this might seem attractive, it’s important to note that this high yield is partly due to the significant drop in share price and also because dividends have been increasingly funded through debt rather than earnings.

A closer look at the numbers reveals the extent of the issue: as of the most recent quarter, BCE reported having $1.66 billion in total cash, contrasted sharply with a staggering $37.67 billion in total debt.

The current ratio, sitting at 0.61, indicates that the company’s short-term assets fall short of covering its short-term liabilities. This metric is a crucial indicator of financial health, suggesting potential liquidity risks.

Despite these challenges, BCE management continues to borrow heavily. In February, following the layoff of 4,800 employees (which was about 9% of its workforce), the company returned to the American bond market to raise an additional US$1.45 billion.

While credit rating agencies have revised BCE’s outlook from “negative” to “stable,” their underlying financial practices remain a concern.

For me, the fundamental issue as a prospective investor is the sheer volume of debt. In a scenario where BCE must choose between missing a debt payment or cutting dividends, it’s almost certain that preserving financial stability by reducing dividends would be the path taken.

What I would buy instead

Qualitatively speaking, I could never invest in a company whose products and services I genuinely dislike. Have you ever had a positive experience with a Canadian telecom?

Between unexpected fee hikes and confining contracts, the experience often leaves much to be desired. This sentiment reinforces my reluctance to invest in a sector where the customer experience is so frequently criticized.

Instead, I’d rather stand by my existing investments, particularly Vanguard S&P 500 Index ETF (TSX:VFV). This ETF provides exposure to 500 notable U.S. companies with a remarkably low expense ratio of just 0.09%.

Its benchmark, the S&P 500 index, has historically outperformed 88% of all U.S. large-cap mutual funds over the last 15 years. Given this track record, I believe investing in VFV represents a far better option than putting money into BCE at this time.

The post 1 Stock to Steer Clear of appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has positions in Vanguard S&P 500 Index ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2024