Did you know that about 20% of companies that cut dividends end up outperforming the market in the following year? It's like they hit the reset button, cutting back to strengthen their balance sheets. This can make them more attractive in the long run. For savvy investors, it could also mean that a dividend cut isn't always the kiss of death but could be the start of something better.

However, before you get too excited, keep in mind that the other 80% usually struggle for a while after slashing dividends. It's a bit like trying to run a marathon after skipping a few training sessions. Not impossible, but definitely challenging. So, while a dividend cut can sometimes lead to a comeback, more often than not, it signals some rough waters ahead. Especially for a stock like BCE (TSX:BCE).

BCE: A dividend all-star

BCE stock, a staple on the Canadian stock market, dates back to the 1880s. Since then, the stock has grown into a telecommunications giant, and its dividend history is just as solid. The company has been dishing out dividends for decades. This has made it a favourite among income-focused investors. In fact, BCE has consistently increased its dividend over the years, offering a reliable stream of income even in turbulent market times.

But it's not just about the consistency. It's also about the generosity. BCE's dividend yield is usually among the highest in the telecom sector, often hovering around 5-6%. This makes it a go-to stock for those looking to pad their portfolios with steady cash flow. While the stock might not be the most exciting ride on the market, its commitment to rewarding shareholders with growing dividends keeps it in the spotlight for many Canadian investors.

That is, except recently

BCE stock has been on a bit of a rollercoaster ride lately, and unfortunately, it's been more of a downhill slide than a thrilling loop-de-loop. Over the past year, BCE's share price has taken a hit, mainly due to rising interest rates and increased competition in the telecom sector. Higher interest rates make BCE's juicy dividend less attractive compared to other safer investments like bonds. This has caused some investors to rethink their positions.

On top of that, the telecom industry isn't exactly a playground for easy profits these days in Canada. With stiff competition from rivals and the hefty costs associated with rolling out new technologies like 5G, BCE has been feeling the pinch. The company's profits haven't grown as quickly as some investors hoped, leading to a bit of a sell-off. So, while BCE remains a solid player, the combination of market headwinds and rising expenses has put some pressure on its stock price.

A cut coming?

BCE has been a staple for dividend investors, offering a reliable income stream, but recent developments suggest that a dividend cut might be on the horizon. The company reported a decline in operating revenues in Q2 2024, along with a slight decrease in adjusted earnings per share (EPS) by 1.3%. This reflected the growing pressures it faces.

While net earnings saw a significant increase, up 52.1% to $604 million, this was driven by cost-cutting rather than revenue growth. This indicated the company is tightening its belt. The hefty capital expenditures, although down 25.2% year-over-year, still weigh heavily on the company's balance sheet. Alongside a massive debt load of nearly $40 billion.

Adding to the concerns is BCE's payout ratio, which has soared to an unsustainable 183%. Essentially, BCE is paying out far more in dividends than it's earning. This is a red flag for any income-focused investor. Despite an 8% increase in free cash flow to $1.1 billion, the drop in cash flows from operating activities by 9.6% indicates potential liquidity issues down the road.

Bottom line

BCE stock may have a massive dividend yield at 8.5%. However, this could come to a cut sooner as opposed to later. Coupled with rising interest expenses and competitive pressures in the telecom sector, BCE may soon be forced to reconsider its dividend policy to maintain financial stability. However, nothing is confirmed. Yet the numbers suggest that a dividend cut could be a realistic possibility to keep the company on solid ground.