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Investment Note: BCE Offers Growth and Value

The defensive stock has steady growth, value and income

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Praveen Chawla
Aug 11, 2020
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Alexander Graham Bell invented the telephone in 1874 at the age of 27. His father started commercializing the invention in Canada in 1878. The Bell Telephone Company of Canada was established in 1880. The company is called BCE, or Bell Canada Enterprise, now and is headquartered in Montreal, Canada.

BCE Inc. (

TSX:BCE, Financial) (BCE, Financial) continues to post steady growth of earnings per share, free cash flow per share and dividends per share. It is part of the telecom oligopoly in Canada with Rogers (TSX:RCI.B, Financial) and Telus (TSX:T, Financial).

The 10-year chart below shows steady growth. The free cash flow is most important here as it continues to climb at a 6.7% compounded annual growth rate. In fact, growth seems to have accelerated a little following the Covid-19 lockdown as a "work-from-home" economy has boomed and high-speed internet has become as necessary as food and shelter.

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The dividend yield is a lush 5.7% with plenty of room to grow. Canada is still underpenetrated with regard to wireless and high-speed internet as compared to the U.S. BCE is rapidly building it fiber to the premises (FTTP) network in major urban areas in Canada. FTTP will work in conjunction with the company's 5G wireless network and will be the backhaul network. BCE is in the process of rolling out 5G across Canada. The fact it is able to produce solid free cash flow in spite of heavy capital expenditures bodes well for the future.

Dividend

BCE pays an attractive and growing dividend. GuruFocus data shows it has a trailing dividend yield of 5.73% and a forward yield of 5.87%. The dividend payout ratio is 1.19%, while the share buyback ratio is -1.3%. The five-year growth rate is 5.1% and the five-year yield on cost is 7.35%.

Valuation

The median price-earnings and median price to operating cash flow ratios indicate that the stock is valued appropriately.

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Using the GuruFocus discounted cash flow valuation tool, I estimate that BCE stock is 10% to 15% undervalued. This together with the 5.7 % dividend and steady growth is attractive.

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Conclusion

BCE is a great defensive stock, providing an essential service, which produces steady income in these uncertain times. As part of a government-regulated oligopoly, it is resistant to foreign competition. The 5.7 % dividend yield and steady mid-single-digit growth suggest the company has good value with decent growth.

Disclosure: The author is long BCE.

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