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BCE Inc. (NYSE:BCE) is the largest Canadian-based provider of telecommunication services, including landlines, wireless services, and Internet services. BCE trades on the Toronto Stock Exchange (TSX) under the ticker "BCE", and also trades on the New York Stock Exchange (NYSE), under the ticker "BCE". BCE is part of the S&P/TSX60 index.

BCE is a Canadian corporation and therefore pays its quarterly dividends in Canadian dollars. In that sense, all the following figures are in Canadian dollars. Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

BCE pays a quarterly dividend, generally declared in November, February, May, and August, and they are generally paid in January, April, July, and October. BCE generally increases its quarterly dividend at least once a year, in February and/or in August. In that sense, the last increase in February 2014 was of 6.0% (CA$0.5825 per quarter to CA$0.6175 per quarter).

Dividend History

BCE has increased its quarterly dividend for 5 consecutive years, making BCE a dividend challenger (between 5 and 9 years of consecutive dividend increases). Still, despite the apparent short dividend increase streak, BCE was a steady dividend grower prior to temporarily suspending its dividend in 2008 during which BCE was the target of a leveraged buyout offer.

Since the deal fell through, BCE reinstated its dividend and has been growing it since. The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

As we can see from the graph, prior to 2008, BCE slowly but steadily increased its dividend. Then, as mentioned above, BCE suspended its dividend for two quarters in 2008 during the period in which BCE was the target of a leveraged buyout offer. After the deal fell through in late 2008, BCE resumed its dividend and has been growing it since at a much faster pace. So the dividend drop in 2008 and the subsequent significant increase in 2009 were caused by the temporary dividend suspension and not for economical reasons.

If we ignore the 2008 dividend drop, we can see that BCE has been a steady dividend grower over the last ten years. However, the graph shows that BCE's dividend has been growing faster in recent years than prior to 2008. As we will see below, I suspect that BCE's dividend growth rate will slow down a bit in the near future.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

Then, the evolution of the free cash flow, dividends, and payout ratios.

To begin with, neither the earnings nor the free cash flow seem to show any clear growing or declining trend. In fact, both the earnings and free cash flow are more or less erratic.

Personally, I would prefer to see a clear uptrend for both the earnings and the free cash flow. Still, despite the erratic earnings and free cash flow, BCE has been able to generally maintain an earning payout ratio under 70%, which is high but acceptable for a telco. With respect to the free cash flow, the payout ratio is a bit high above 80%.

Despite the relatively high payout ratios, I don't think BCE's dividend is in danger. First, BCE just increased its dividend by 6%, indicating BCE's management is confident it has the financial resources to pay such a dividend.

Second, like Telus last week, BCE operates in a near monopoly. The Canadian telecommunication market is indeed controlled by three main operators, BCE, Telus (TSX: T, NYSE: TU) and Rogers Communications (TSX: RCI.B, NYSE:RCI). Among the three, BCE is the largest. BCE's market is thus very much controlled.

Overall, I think the current dividend is safe but I would keep an eye on the future payout ratios.

Is the current dividend likely to grow?

Based on the recent dividend history of BCE, we can safely conclude the BCE has shown its willingness to increase its dividend. In that sense, BCE just announced another dividend increase this month.

So, the dividend is likely to grow. However, I don't expect the dividend to grow at a very fast rate.

Though BCE operates in a near monopoly environment, thereby providing some safety to its earnings, it remains that BCE already pays around 70% of its earnings in dividends. That, in my view, does not leave much room for large future increases (unless BCE increases its earnings faster).

Thus I expect BCE's dividend to continue to grow but I also expect its dividend growth rate to remain in the low single digits (around 5%).

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For BCE, I've used the following inputs:

  • Share price: $47.50
  • Dividend rate: $2.47
  • Dividend growth rate:
    • Optimistic scenario: 7.0%
    • Realistic scenario: 5.6%
    • Pessimistic scenario: 4.2%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for BCE varies from $52.71 (pessimistic) to $69.01 (optimistic) with a realistic value of $60.19. With a current share price around $47.50, BCE appears undervalued. I've also calculated that the DGR would need to be 3.07% over the next 20 years to justify the current price of $47.50.

Notably, a DGR of 3.07% is lower than the average dividend growth rate over the last 10 years (~7.0%) and is also lower than the average earning growth rate over the last 10 years (~5.6%). It seems that BCE should be able to maintain a DGR of at least 3.07% in the future. Combined with a current yield around 5.2%, a DGR of at least 3.07% would make BCE an interesting investment.

At $47.50, I think BCE is undervalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years. Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For BCE, I've used the following inputs:

  • Initial investment: $1000
  • Current yield: 5.20%
  • Dividend growth rate:
    • Optimistic scenario: 7.0%
    • Realistic scenario: 5.6%
    • Pessimistic scenario: 4.2%

Notably, the DGRs are the same as the DGRs used for valuation. I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

With respect to the cash return, what is interesting to note is that both the realistic and the optimistic scenarios beat the benchmark stock over the whole 30 years. However, the pessimistic scenario gets overtaken by the benchmark stock after 25 years.

This shows that over time, lower yield but higher growth can provide better returns than higher yield but lower growth. As to which scenario is most likely to occur, it's hard to say. I would go with the realistic one with a DGR of 5.6%.

However, if you don't want to wait 25 years for an investment in the benchmark stock to beat an investment in a stock yielding 5.20% and growing at 4.2% per year, you could very well go with BCE.

At the current price and yield, I think BCE would make a good dividend investment.


With a current yield at 5.20%, BCE offers a very generous yield. However, in view of its relatively high payout ratio, I think BCE will only be able to grow its dividend at about the same rate as its earnings, with a growth rate around 5% over the last ten years.

Still, even with a very low dividend growth rate, BCE appears to be undervalued. Overall, the dividend is safe, it is likely to grow, and the stock seems undervalued. So, if you are willing to trade higher yield in exchange for lower growth, BCE is the stock to own. What do you think?

Final recommendation: I think BCE is a buy.

Disclosure: I currently own shares of BCE. I don't intend to add to my position in BCE within the next 72 hours.

Source: BCE Inc. Dividend Fact Sheet