The market right now is torn between data that suggests the U.S. is waning, and reports that many companies are increasing guidance and beating earnings estimates. This has created a lot of volatility, and if you already have enough strong growth plays in your portfolio, adding some large, established companies with stable cashflows and hefty dividend yields could ease some of the anxiety you may be feeling.
Such an approach, in my opinion, is superior to bonds, since bond yields are just too low at these levels. That means you actually risk capital losses if they go up. In addition, safe dividends paid by leading companies are higher than bond yields. And unlike bonds, big companies usually can adjust prices in accordance with inflation.
There are a lot of companies for an investor to choose from, but BCE Inc. (BCE) jumps out at me immediately. It is a dominant, well-managed company, and it has strong upside potential.
Let me explain...
In the new world of telecommunications it's not enough to be the dominant supplier of wireline services to the home. Wireless and Internet telephones are where the big growth has been. That's why telecommunications companies now offer the "triple play," which means bundling home phone service with their Internet and cable television services. This bundling lets providers offer a cheaper price for the bundle than a consumer could get by buying each service separately.
In this new world, it helps to have an established name and customer loyalty that delivers a strong cashflow. These are the elements that allow BCE to take advantage of the new market reality. For starters, BCE is endowed with a strong leadership in its legacy wireline business, which accounts for 60% of its revenue and provides ample profits to fund the company's initiatives in the other areas.
BCE has responded magnificently. It was the first company in the world to offer the "quadruple play": both wireline and wireless services, plus high-speed Internet access and cable TV! BCE also has the largest satellite TV operation in Canada and its own proprietary content. This strong satellite TV service gives the company an important competitive advantage when bundled together with other services.
Additionally, BCE's wireless operation, which accommodates bandwidth-hungry smartphones, has shown very strong second-quarter growth. This made possible BCE's high-speed packet access (HSPA) network, which covers 93% of Canada's population. The network, which can carry the bandwidth-addicted Apple Inc. (AAPL) iPhone, is a major plus. AT&T Inc. (T) has had great success with the iPhone and that story is repeating itself in Canada. Subscriber growth, data fees and roaming fees have afforded BCE very strong earnings growth and some market share gains.
In both the satellite and wireless cases, large but efficient infrastructure investments give BCE a distinct advantage over other well-run wireless franchises. Of course, it is important to note that Canada's market benefits greatly from non-predatory behavior between wireless competitors. Rather than entering into destructive price wars, Canadian wireless competitors prefer to compete with quality of service. That way they preserve the industry's profitability and the cashflow necessary to keep modernizing and improving their services. Both investors and consumers benefit.
At this point, most wireless and wireline growth potential is limited in most countries. These markets have been saturated. But that's not the case in Canada. Canada's wireless market has tons of room to grow. It has a low penetration rate of 70%, compared to more than 85% for Singapore and 115% for Europe.
So the investment proposition in BCE is compelling. The stock - typically thought of as defensive, because of "slow" earnings growth - is sitting at a very low multiple of less than 11-times next year's earnings.
BCE just increased dividends by 10%, and the stock now yields 5.70%. That compares to less than a 2.6% yield for 10-year U.S. Treasuries. And, again, BCE can adjust prices upwards if needed, but the nominal value of U.S. Treasury bonds cannot be increased if inflation accelerates. The company also is buying back shares, which should also support the stock price.
So, we are going to take advantage of this opportunity by reducing volatility in our portfolios, increasing our income, and entering into a "defensive" stock that is easily undervalued by some 25%-50%. The stock is in a bullish trend, trading above its relevant moving averages, near its 52-week high and should be making new highs soon.
Disclosure: Author holds no position in BCE Inc.