On Tuesday, BofA Securities issued a downgrade for BCE Inc . (NYSE: NYSE:BCE) stock, moving its rating from Neutral to Underperform.
The revision comes in light of anticipated growth headwinds for 2025, high leverage, and concerns surrounding the sustainability of the company's dividend, which is projected to exceed 120% of its free cash flow based on the midpoint of its 2024 guidance.
The analyst at BofA Securities highlighted that the risks for BCE are tilted to the downside until the company can present a clear strategy to address its high leverage and dividend payout concerns. In the previous year, BCE undertook several financial maneuvers, including the divestitures of NorthwesTel and Maple Leaf Sports & Entertainment (MLSE), the acquisition of Ziply Fiber, and the suspension of dividend growth until the end of 2025. Additionally, BCE introduced a discount on its Dividend Reinvestment Plan (DRIP) as a cash conservation measure.
These actions are deemed to have slightly improved BCE's growth outlook but have also marginally increased net leverage, without resolving the fundamental issues.
Alongside the downgrade, the firm also reduced the price target to $36.00 from the previous $45.00. The analyst expressed that until BCE provides a transparent plan for reducing leverage and establishing a sustainable dividend, the company's shares are likely to underperform compared to its industry peers.
The new price target of $36.00 is based on a forward price to free cash flow (P/FCF) multiple of 9.0 times, which also corresponds to a forward enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of 7.0 times.
This target multiple is set below the historical average to reflect the perceived risks associated with BCE's leverage and the potential for a reduced dividend in the future.
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