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Summary

  • BCE's wireless segment remains its main contributor to a good future for the company.
  • The stock’s high dividend yield of 5.2% is backed by strong cash flows.
  • Wait for a pullback before initiating a buy position.

BCE Inc. (NYSE:BCE) has been delivering a healthy financial performance in the recent past due to improved performance in both wireless and wireline segments, generating strong margins and a healthy churn rate. BEC, one of the top telecom dividend stocks in Canada, has the highest dividend yield of 5.20%, amongst its peers, backed by its strong cash flows. Also, BCE's recent spectrum acquisition from airwaves auction is a step towards improving its services, subscriber base and strengthening its cash flows. Based on my price target of $41, the stock does not offer price appreciation, therefore, I recommend investors to wait for a pullback before initiating a 'buy' position in the stock.

BCE is one of the largest communication companies in Canada and is well positioned amongst peers in the wireless market. The following table shows Canadian wireless market share among three major companies, including BCE, Rogers Communications, Inc. (NYSE:RCI) and TELUS (NYSE:TU).

Companies

Market Share

BCE

28.1%

RCI

34.9%

TU

28.6%

Others

8.4%

Wireless - BCE's Growth Engine
BCE's wireless segment has proved to be its growth engine, as it has been experiencing subscriber additions, ARPU increases and a stable churn rate. An improved subscriber base driven by smartphone penetration resulted in the improvement of ARPU. Moreover, a reduction in consumer roaming rates, and further reduced data and voice rates for certain popular international destinations gave an upside to its revenues. The rates reduction was balanced out by an increased volume of subscribers; therefore margins for the segment remained solid. I believe the wireless segment of BCE will remain its main growth driver, which will portend well for the stock price. Also, the wireless segment's revenues are likely to increase in the near future with more additions of high value customers, which will also benefit the margins. The following table shows year-on-year increases in revenues, EBITDA margins growth, subscriber additions, healthy ARPU growth and churn rate of BCE's wireless segment in recent quarters.

Q1-13

Q2-13

Q3-13

Q4-13

Revenue change

6.3%

5.4%

4.1%

3.2%

EBITDA Margin Changes

11.6%

8.9%

11.6%

10.4%

ARPU change

3.9%

2.7%

1.7%

2.1%

Churn Rate

1.60%

1.60%

1.50%

1.59%

Subscriber Addition Change

3.6%

3.6%

3%

1.3%

Source: Company's Annual Earnings Report

Improving Wireline Operations
BCE's wireline segment remains relatively weak due to secular changes in the industry. The company has been making continuous efforts to stabilize the segment's revenues and margins. With Fibe TV services expansion, the segment's revenues are showing signs of improvement. Currently, BCE's subscriber base is more in Quebec than in Ontario, but great growth potentials in Ontario are moving the company's focus of expanding Fibe TV to Ontario. Expansion of Fibe TV in Ontario will improve its subscriber base, services and will lead to margin expansion for the segment, which will portend well for its future performance. The following chart shows the moderating revenue decline trend for BCE in recent quarters.
(click to enlarge)
Source: Company's Quarterly Earnings Report

Also, EBITDA margin growth trend for the segment is improving, as shown below.

Source: Company's Quarterly Earnings Report

Safe and Stable Market Leading Dividend Yield
BCE has been sharing its success through dividends, which is why it remains a good investment option for dividend-seeking investors. In the last five years, the company has increased its dividends on average by 25%; dividend increases are supported by its strong cash flows and a healthy balance sheet. The company offers a high and sustainable dividend yield of 5.20%. The company recently increased its annual dividend by 6%, from $2.33 to $2.46. The dividend increase is justified with its solid cash flow generation. The dividend payments by the company are backed by its solid free cash flows, as shown below.

Source: Company's Annual Report and Calculations

The following chart shows BCE has the highest dividend yield in comparison to RCI and TU.
(click to enlarge)
Source: Reuters (BCE, TU, RCI)

Airwaves Auction-Diverge the Canadian Shares
BCE made the best out of the airwaves auction by getting 31 licenses for $565.8 million. A total of 97 licenses were awarded in the auction. The license acquisition will allow the company to expand its services and improve service quality. Now BCE will be able to cover 98% of the Canadian population. The licenses acquisition will allow the company to use its new capacity to cater to the growing demand for mobile data usage, such as video streaming. As the company continues to strengthen its network, I believe it will strengthen its subscriber base and fuel earnings growth.

Price Target
I have calculated a price target of $41 for RCI. For my price target calculations, I have used cost of equity 9.25%, after tax cost of debt 3.5%, nominal growth rate of 1% and WACC of 7.52%. My price target of $41 represents that the stock is fairly valued. I recommend investors to wait for a pullback before imitating a 'buy' position in the stock.

2015

2016

2017

2018

Terminal Value

FCF(In-$millions)

2,664

2,937

3,210

3,509

54,356

Present Value(In-$millions)

2,502

2,905

2,581

2,625

40,658

Source: Equity Watch Estimates and Calculations

Total Value of Firm = $2,502 + $2,905 + $2,581 + $2,625 + $40,658= $51271

Total Value of Debt = $19,270

No of Shares Outstanding = 777.09 million

Market Value of Equity = $51,271 - $19,270

= $32,001

Price Target = Market Value of Equity / No. of Shares Outstanding

= $32,001 / 777.09

= $41

Conclusion

The company's wireless segment remains its main growth driver, and is experiencing revenues growth and EBITDA margin growth, which I believe will portend well for its future performance. Also, the company has been making continuous efforts to strengthen its wireline segment, and has been making progress with its efforts. Moreover, the stock offers a high dividend yield of 5.2%, which are backed by its cash flows. I believe the stock is fairly valued based on my price target calculation of $41; therefore, I recommend investors wait for a pullback before initiating a 'buy' position.

Source: BCE Inc.: Patience Is Key For The Time Being, Waiting To Buy