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Ben Reynolds
Ben Reynolds
Articles (790)  | Author's Website |

Blue-Chip, High-Yield Telecommunications Leader

The investment prospects of Canadian telecom BCE analyzed in detail

July 12, 2017 | About:

(Published by Nick McCullum on July 12)

When investors think of high-quality dividend stocks in the telecommunications sector, the first two businesses that come to mind are likely AT&T (NYSE:T) and Verizon Communications (NYSE:VZ).

But there are plenty of other appealing investment opportunities in this sector.

Surprisingly, the Canadian telecommunications industry is a fantastic source of high-yield dividend stocks.

BCE Inc. (NYSE:BCE) – or Bell, for short – stands out as the undisputed leader in the Canadian telecommunications industry.

This blue-chip stock is held in the portfolio of many self-directed Canadian investors. If you’re looking for information on additional blue-chip stocks, the Blue Chip Stocks Excel Sheet contains pertinent investment information on all stocks in the Sure Dividend database with 100-year-plus operating histories and 3%-plus dividend yields (including BCE).

Bell’s high dividend yield of 5.0% also stands out to income investors. Dividend yields of this magnitude are rare in today’s stock market. The High Dividend Stocks Excel Sheet contains a comprehensive list of all companies with 5%-plus dividend yields, of which there are only 405 (including BCE).

BCE’s status as one of Canada’s most well-known blue-chip stocks combined with its exceptionally high dividend yield help it to stand out to income investors.

Business overview

BCE is Canada’s largest telecommunications conglomerate with a market capitalization of $40 billion.

The company is listed on both the Toronto Stock Exchange and the New York Stock Exchange. U.S. investors can purchase the company on the NYSE subject to a 15% dividend withholding tax, which is waived in retirement accounts thanks to a tax treaty between the two countries.

BCE stands for Bell Canada Enterprises. Unsurprisingly, it can trace its roots to the Bell system pioneered by the inventor of the telephone, Alexander Graham Bell. Until 1975, AT&T had a significant stake in BCE (then called Bell Canada).

Today, Bell operates in three segments:

  • Bell Wireline.
  • Bell Wireless.
  • Bell Media.

Each segment’s contribution to first-quarter revenues can be seen below.

BCE Inc. Revenues By Segment

Source: BCE Inc. First Quarter Earnings Fact Sheet

BCE operates in the Canadian telecommunications oligopoly. Its major competitors are TELUS (NYSE:TU) and Rogers (NYSE:RCI).

Current events and growth prospects

One of the most notable current events for BCE shareholders was the company’s recent acquisition of Manitoba Telecom Services (TSX:MBT), which closed in mid-March.

The transaction saw BCE purchase all of the issued and outstanding Manitoba Telecom common stock for $3.1 billion. BCE also assumed an additional $800 million of debt during the transaction for a total enterprise value of $3.9 billion.

The major benefit of this acquisition is the increased geographic exposure that Bell now has in Western Canada. This geography has been historically dominated by TELUS along with smaller regional players like Manitoba Telecom and SaskTel.

Post-transaction, Bell’s wireline footprint now extends to 73% of Canadian households, giving it a comprehensive reach across this large country.

BCE Inc MTS Extends BCE's Wireline ILEC Footprints to 73% Of Canada's Total Households

Source: BCE Inc. First Quarter Earnings Presentation, slide 5

Bell also benefits from a noticeable addition to its subscriber base.

The Manitoba acquisition gives Bell an additional 700,000 wireless, internet and television subscribers in the province of Manitoba, a region where Bell has been historically underrepresented.

Further, the acquisition is expected to be immediately accretive to Bell’s free cash flow, an important metric for a company like Bell that pays a sizable dividend payment.

BCE Inc MTS Provides Increased Broadband Scale and Efficiencies

Source: BCE Inc. First Quarter Earnings Presentation, slide 6

All said, the integration of Manitoba Telecom will be the driver of Bell’s growth for the foreseeable future.

Competitive advantage and recession performance

BCE has two major competitive advantages.

First, the company has tremendous brand equity among the average Canadian consumers. When shopping around for telephone, internet or cable services, consumers are highly likely to choose Bell because it is such a well-known business.

Additionally, Bell benefits from being Canada’s largest telecommunications company. This allows it a geographic reach unattainable by its smaller peers. Furthermore, Bell’s industry-leading size allows it to realize economies of scale and pass these savings on to its customers.

Bell is a relatively recession-resistant business, as are most telecom companies. Simply put, consumers are not likely to cut their telecom bills in today’s highly connected world.

Bell’s resilience can be seen in the company’s performance through the last recession. BCE’s adjusted earnings per share during the global financial crisis can be seen below.

  • 2007 adjusted earnings per share: $2.35.
  • 2008 adjusted earnings per share: $1.85 (21.3% decrease).
  • 2009 adjusted earnings per share: $2.37 (28.1% increase).
  • 2010 adjusted earnings per share: $2.85 (20.3% increase).

Note: Data are in U.S. dollars because it is sourced from Value Line.

BCE’s adjusted earnings per share declined by 21% during the Great Recession but hit a new high the following year and reported two years of 20%-plus growth immediately following the economic downturn.

Thus, BCE can be seen as a relatively recession-resistant stock to hold in one’s portfolio.

Valuation and expected total returns

Today’s market is trading at valuation levels exceeding its long-term average. This makes it difficult to find value in the stock market, particularly for blue-chip stocks like BCE.

Fortunately, BCE does not appear to be grossly overvalued at today’s levels.

Bell reported adjusted earnings per share of $3.46 in fiscal 2016. The company’s current stock price of $57.97 Canadian ($44.89) is trading at a price-earnings (P/E) ratio of 16.7 using 2016’s earnings.

A P/E ratio of 16.7 is likely fair given the quality of Bell and its appeal to dividend investors. With that said, BCE is expecting a slight decline in adjusted earnings per share for the year-ahead period, which makes its forward P/E ratio slightly less appealing.

BCE is expecting adjusted earnings per share of $3.30 to $3.40 for fiscal 2017. Taking the midpoint of this guidance band gives an adjusted earnings-per-share expectation of $3.35, a 3.2% decrease from 2016’s earnings.

Using the $3.35 midpoint of Bell’s 2017 earnings guidance and the company’s stock price of $57.97 gives a P/E ratio of 17.3, still a fair value for a high-quality stock like Bell.

But how does this compare to Bell’s historical valuation levels?

Bell’s current valuation is compared to its long-term average below.

BCE Inc Valuation Analysis

Source: Value Line

BCE’s valuation using either 2016 earnings or 2017 expected earnings is above its long-term historical average.

Interest rates are near all-time lows right now, which pushes stock valuations upward. Given our current interest rate environment, BCE is trading near fair value and is a potential buy for income investors today.

In other words, BCE’s valuation is likely to have a minimal effect on the company’s total returns moving forward. This means that investor returns will be primarily driven by the company’s high dividend yield combined with earnings-per-share growth.

BCE is one of the most well-known dividend stocks in Canada, largely due to its combination of dividend safety and high yield.

The company pays a quarterly dividend of 71.75 Canadian cents, which yields 5.0% on the company’s stock price.

Bell’s dividend yield is noticeably elevated above its normal level thanks to a long history of regularly increasing its dividend payment. The company’s high yield indicates that right now is a historically opportune time to initiate or add to a stake in this company.

Bell’s dividend is also safe. The company’s quarterly payment represents a payout ratio of just 83% using 2016’s adjusted earnings per share of $3.46. While 83% would be a very high payout ratio for many industries, it is not unheard of in the telecommunications sector. Bell’s dividend is safe for the foreseeable future.

The remainder of BCE’s total returns will be comprised of earnings-per-share growth.

Since 2001, the company has managed to compound its adjusted earnings per share at a rate of 6% per year.

Growth may moderate slightly moving forward. Investors can conservatively expect 4% to 6% earnings-per-share growth over full economic cycles.

All said, Bell’s expected total returns are composed of:

  • 5.0% dividend yield.
  • 4% to 6% adjusted earnings-per-share growth.

For long-term total returns of 9% to 11% before any effects from changes in valuation multiples.

Final thoughts

BCE’s blue-chip reputation and unique combination of yield and safety make it appealing for income investors.

Recently, the company  expanded regionally through the acquisition of Manitoba Telecom Services and stands to benefit from society’s increasing reliance on communications networks and technology.

Thus, this company presents a conservative opportunity to boost the average yield of your investment portfolio. Bell is a buy for investors whose primary goal is income generation.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website


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