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By Andrew Willis

At the risk of incurring the wrath of long-suffering BCE (BCE) shareholders, George Cope may be overly generous.

Mr. Cope is likely to be lionized today, after announcing a 7% increase in the dividend on Bell Canada’s stock – the third hike in the past 12 months, and well above the 5% jump that was anticipated. A $500 million share buyback is also coming.

BCE has a long and ugly history of hosing out the cash it generates on acquisitions. Mr. Cope will please many of the company’s owners by simply sending profits their way. BCE’s planned conference call at 8:30 a.m. on Thursday should be nothing short of a love-in.

But there is another way forward. And it’s always fun to spend other people’s money.

A smart strategic move for BCE would be to build up cash reserves for a few more quarters, then buy out minority shareholders in Bell Aliant Regional Communications Income Fund.

BCE currently owns 44% of the regional phone trust, and moving to 100% control by taking out unit holders would cost something in the neighbourhood of $4 billion.

I can hear BCE investors screaming already – they would fear that such an acquisition is the hallmark of another empire-building CEO at Bell Canada, wasting cash on acquisitions.

But this deal does make sense. Bell Aliant was created for another age, when income trusts enjoyed favorable tax treatment. That age ends next year, at which point, you can argue that BCE is better off capturing all the cash generated from regional phone lines, and better positioned strategically if it can bundle its products – such as wireless, Internet and satellite TV – for Bell Aliant customers.

Here’s what’s striking about BCE: Mr. Cope has the flexibility to both increase the dividend today, and take out Bell Aliant when its tax status changes next year. The last regime, headed by the oft-critized Michael Sabia, left the BCE balance sheet in terrific shape. BMO Nesbitt Burns analyst Peter Rhamey said in a report last week: “With free cash flow of $1.75–1.90-billion targeted for this year and expectations for a similar performance in 2010, we are factoring a $700 million share buyback in 2010.”

Source: Where Should BCE Spend Its Cash?