Is BCE's dividend growth at risk?

BCE Inc.'s (BCE-T) quest to continually grow its dividend may be at a risk now that its proposed $3.4-billion takeover of Astral Media (ACM.B-T) has been blocked by the federal broadcast regulator.

BCE surprised investors in August by offering a dividend hike earlier than expected. CEO George Cope highlighted the pending takeover of the Astral deal as one of the reasons for the boost.

"Bell's strong year-to-date operating and financial performance, and the positive outlook for the balance of the year, enables the dividend increase and increased 2012 financial guidance announced today. Also providing support for the early dividend increase is our pending acquisition of Astral, which we expect to be accretive to overall earnings and free cash flow in 2013," Cope said in a statement, releasing its second-quarter results.

The boost marked the eighth hike to BCE’s dividend for common shares since the fourth quarter of 2008. BCE's dividend has grown by 55 percent over that time.

BCE's current strategy is to maintain a dividend payout ratio of 65 percent to 75 percent of adjusted net earnings per share. In the most recent quarter, the company expected its payout ratio to fall in the middle of that range.

But that growth may be at risk, some analysts warn.

"We believe BCE's dividend growth strategy is now compromised without Astral. The Astral transaction would have provided BCE with the Earnings Per Share (EPS) and Free Cash Flow Per Share (FCFPS) accretion to fund its 5% dividend growth in 2013," Scotia analyst Jeff Fan said in a note to clients.

Fan estimates that Astral would have added $135 million in free cash flow -- an important financial metric as it is often used to fund expansion -- to BCE in 2013.

He believes that the added cash flow from Astral would have helped BCE fund its accelerated rollout of Fibe – its next generation of internet service.

"Without an accelerated Fibe rollout, there should be less competitive threats against its cable competitors. Further, with less content concentration at BCE, the cable competitors are less disadvantaged through potentially higher prices or less favourable arrangements," he says.

Now that the Astral purchase has been rejected, Fan says BCE may focus on its next acquisition, which he believes could be MTS (Manitoba division) or Bell Aliant.

Canaccord Genuity analyst David Ghose agrees, though he estimates that Astral would have added less to BCE's free cash flow.

"We estimated that the deal was 3 percent EPS and FCF/share accretive in 2013. Consequently, if the deal is not revived, EPS growth could become more challenging for BCE," he says. "We believe that TELUS is much better positioned when it comes to dividend growth and that its dividend growth is not driven by, or predicated on, M&A."

But RBC analyst Drew McReynolds says that while the deal will have an impact on BCE's free cash flow, the dividend strategy is not at risk.

"Despite the loss of adjusted EPS accretion, we do not believe BCE’s dividend growth model is at risk. However, given the most recent dividend increase concurrent with Q2/12 results, we would not expect another dividend increase for several quarters," McReynolds says in a note to clients.

BNN is a division of Bell Media, which is owned by BCE.