Long-Term, BCE Will See an Operational Turnaround - RBC

Little room for dividend growth, most of its C$2.6-billion in cash apparently committed, a drag from its pension deficit, and a forecasted earnings decline in 2009 are among the reasons BCE Inc.’s (BCE) outlook is challenged. On the positive side, the stock offers a secure 6.5% dividend yield, its operations are defensive compared to other sectors, and long-term investors could see upside from an operational turnaround.

This comes from RBC Capital Markets analyst Jonathan Allen, who resumed coverage on BCE with a “sector perform” rating and price target reduction from C$42.75 to C$23.00. At that price, he considers the stock well valued, noting that it trades at a premium to rival Telus Corp. (TU). However, Mr. Allen expects that situation to reverse itself.

He told clients:

With little room for dividends/capital returns, BCE becomes a pure turnaround story. The company has already made progress in 2008 with customer service, a new brand, and lower costs. But a complete turnaround, especially in a slowing economy be challenging and take a few years.

The analyst estimates that BCE’s pension deficit will rise from C$900-million in 2007 to more than C$4-billion in 2009. Consensus earnings per share of C$2.22 does not adequately reflect the pension drag, so that number could come down as a result, he added.

With a forecast of C$600-million in free cash flow for 2009, that leaves modest room for share repurchases or debt reduction, especially if BCE chooses to accelerate its high-speed fibre access strategy, Mr. Allen said, suggesting this could cost another C$1-billion.