BCE: Another Share Buyback?

Jun.25.09 | About: BCE Inc. (BCE)

It appears that BCE Inc. (NYSE:BCE) is gearing up to instate another share buyback program after its recent debt issue locked in an attractive financing rate. Bell Canada intends to call C$600-million worth of 5.5% Aug. 2010 bonds after an oversubscribed issue of five-year notes with a coupon of 4.85% raised $1-billion on Tuesday.

This should bring BCE Inc.’s cash balance to more than C$1.2-billion by year-end, according to Jonathan Allen at RBC Capital Markets. He expects the company to undertake another share repurchase program later this year.

The analyst also noted that BCE could use some of the proceeds for additional capital expenditure, although he considers this unlikely given the company’s existing plans and tighter spending focus.

The proceeds of the offering will be used to prefund debt coming due in 2010, according to Peter Rhamey at BMO Capital Markets. This reduces the amount of cash BCE had reserved on its balance sheet to meet refinancing obligations

“We believe BCE will use excess cash to buy back stock,” the analyst said in a note.

Earlier this year, BCE expressed a desire to establish itself as a dividend growth company. It has already boosted the dividend by 5%. However, Mr. Allen told clients that both the economic downturn and increased wireless competition makes organic earnings growth more challenging in the coming years.

Since BCE currently pays out 65% of normalized (unadjusted) earnings per share (NYSEARCA:EPS), he said it will have a tough time raising dividends in 2010 and 2011 without increasing this payout.

However, the analyst noted that a $1-billion buyback, equivalent to roughly 5% of shares outstanding, would prove accretive to BCE’s share price, help the company grow EPS in 2010 and leave more room for dividend increases.