Is BCE stock good value today?

Maybe not, but a lot depends on growth and competition

Trading today at CDN$43 a share and paying a $3.99 annual dividend, BCE yields about 9.3% which many investors (including me) find attractive. But the company is only earning a bit more than half the current dividend and still has a few years of relatively high capital outlays to fund to complete its efforts to bring fibre to the door of every served household.

Operating costs should drop once that program is complete, likely in six or seven years. In the meantime, if the current dividend is maintained, BCE debt will rise by about CDN$5 billion over the next six years until (I estimate) cash flows after capital outlays more or less cover the dividend and dividends begin to rise again. If the environment turns a bit hostile, there is a chance BCE will cut the dividend.

By most metrics BCE is fully-valued as it trades approximately at its book value per share and at a multiple of EBITDA more or less at (or a tad higher than) its domestic and U.S. rivals at about 7 x.

Having said that, the Canadian communications market is a bit of an oligopoly with Rogers, Telus the main rivals and the three of them sharing about 90% of the Canadian wireless market, with Rogers the leader with 34% and BCE and Telus each with about 28% and Cogeco holding most of the remainder.

These three carriers all pay high dividends, but BCE pays the most since it is paying out more than it earns (not a great long term plan). I am asked “is the dividend sustainable?”. Wrong question. The real question is whether BCE stock is worth CDN$43 a share.

I think its is. Dividends are a financing decision and by overpaying earnings BCE is increasing its debt leverage which for many companies would increase risk but for a telecom in Canada that risk is pretty low. By front loading its capital outlays to convert all customers to fibre optics, BCE has set the stage for lower operating costs in future years and its strong franchise is not really all that vulnerable to share erosion, since none of the three large players would want a price war.

Regulatory intervention is the key risk to this company, and with returns on equity about the same 9.3% as the current dividend rate, it is hard to mount a persuasive argument that BCE overcharges its customers or that regulators would take much interest in attacking the company on behalf of consumers.

In my view, both the dividend and the stock price will move up or down from time to time but the possibility we will wake up in a few years and find BCE has failed is too remote for sensible consideration.

I don’t see much prospect for short term price appreciation, some risk of further decline in trading price, and the risk the directors decide at some point to bring the dividend down to match free cash flow is worth pause, but I like the company and think when you can buy a major profitable Canadian enterprise like BCE for a price close to book value, you might abandon short term thinking and buy and hold the shares for decades. Sure the dividend may get cut in half and the yield drop to 4.5% but so what? If it happens, and it well might happen, the opportunity to add shares below book value will emerge and 4.5 % dividend income is not that shabby anyway.

One factor that may increase the demand for data transmission is the emergence of artificial intelligence (AI) which is a data hog. Users using Perplexity or ChatGPT for searches consume about ten times as much data as those using Google or Bing, I understand. The big fibre networks (which have become essential infrastructure for our country) benefit. Satellite and cable are alternatives and will persist but satellite has reliablity issues and cable is limited by bandwidth and costly, so fiber is where I think the world will keep going.

If Canada’s population keeps growing at 3 to 4% a year, demand for smartphones and internet connections will grow in lock step and BCE will (like is rivals) benefit. In summary, at today’s price I think BCE is a good anchor holding in a retirement portfolio and bought 3,000 shares to add to my own.