BCE Inc.: Increased Dividend Makes It A Better Buy

May 10, 2022 3:55 AM ETBCE Inc. (BCE), BCE:CA16 Comments9 Likes
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Summary

  • BCE recently increased its dividend, which gives another reason to buy this stock.
  • All of the company's segments are performing well with strong YoY growth.
  • Telecommunications is a vital service, even in a recession, so it makes it a solid investment for conservative investors.

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BCE Inc. (NYSE:BCE) is now a stronger option for investors thanks to its dividend increase. The company announced that it will increase its dividend to C$0.92 on May 9 this year, which increases its dividend yield to 5.2%. This dividend amount is slightly above the average in the telecommunications industry. However, the company also has great historical and forward earnings and plenty of free cash flow to make this a great defensive option in investors' portfolios.

There are, however, some points of concern for this stock. The first is that the stock's dividend is not well-covered by the company. This means that if the company cannot keep up with the increased dividend, then this may start eating into the company's balance sheet. The other concern for this stock is that it has high levels of debt, but this is not a realistic concern for an asset-heavy company in its industry.

Company Overview

BCE is one of Canada's largest companies with a market cap of $49.399B. It has operations in four key sectors: communications, media, entertainment and sports; financial services; business solutions; and consumer markets. The company has major brands in Canada, such as Bell Canada, CTV Television Network, and The Globe and Mail. BCE has more than 12 million customers across Canada and employs over 40,000 people in Canada and around the world.

BCE Q1 2022 Results

For Q1, revenues increased 2.5% YoY to C$5,850 million, which beat consensus estimates. The company experienced the most amount of growth from service revenues. On the other hand, the company was also affected by the supply chain, as revenues declined 8.8% to $673 million for its handset sales.

Another positive for the company was the fact that its adjusted EBITDA was C$2,584 million, a 6.4% increase from the year before.

A downside for the company was in its cash generation. The business generated C$1,1716 million in cash compared to C$1,992 in the prior-year quarter.

In terms of guidance, the company said that investors can expect a growth of 1% to 5% and an adjusted EBITDA between 2% and 5%. FCF is expected to grow between 2% to 10%.

BCE's Segment Growth

The three core parts of BCE's business are its Wireless, Wireline, and Media sectors. Part of what makes this an impressive company is that BCE has continued to add subscribers to all sectors of its product lines as well as reducing churn and net losses. The Bell Wireline sector is where the company is experiencing the most amount of growth, growing at a rate of 22.7% YoY.

BCE Investors Presentation

BCE Investors Presentation

BCE's debt

In order for a balanced analysis to be made, something must be said about the company's debt to equity ratio, which currently stands at 126%.

Debt to equity ratio is a financial ratio that measures the proportion of a company's total assets that are financed by debt. It is calculated by dividing the total amount of debt by the total amount of equity.

A high debt to equity ratio can be bad for a company because it means that they have more liabilities than assets. This can make it difficult for them to pay off their debts and may lead to bankruptcy in extreme cases. I do not feel that this will occur for this stock, but it is something to pay attention to.

Simply Wall St

Simply Wall St

Looking into the company's debt closer, it should be noted that its short-term assets are not sufficient to cover its short-term or long-term liabilities. A company needs to cover short-term liabilities in order to avoid bankruptcy. The company can do this by either borrowing money or by using its cash reserves, of which BCE has USD$289M in reserves, so this is not a cause for concern.

Simply Wall St

Simply Wall St

BCE's Dividend Coverage Ratio

I noted earlier in my analysis that the new dividend could be unsustainable for the company to manage without eating into its cash reserves. Note that analysts' consensus forecasts for the company's EPS are set to be 14.5% for this year alone. Tools estimating the coverage ratio for the dividend put it at 102%, which means that the company may need to start dipping into its balance sheet in order to pay out the dividends to investors.

Yahoo Finance

Yahoo Finance

Valuation

BCE has a P/E ratio of 21.5. With this valuation in mind, it sits in the 92% percentile of companies in the Communication Services sector. This could be interpreted as the company is expensive relative to its peers, or that the market believes that the company deserves a higher ratio due to its attractive growth prospects.

My interpretation of the company's P/E ratio is that it has earned its place here as a stable and growing company with growth across all of its industry segments and is now offering a higher dividend to compensate investors even more.

Finbox

Finbox

I don't see the company's P/E ratio as expensive, but rather it is a good opportunity for investors to hop on to a historically strong performer that provides shelter against the macroeconomic turbulence we've been witnessing.

Even if a recession does hit, BCE provides essential communication services that businesses and consumers cannot really live without, which makes it a solid defensive investment for investors of different risk appetites.

Risks

In my view, one of the main risks that BCE faces comes from the swathes of competitors. Telecommunication products have only minor differentiation from provider to provider. Price wars can easily flare up to diminish market share and eat away at profitability. Although the company isn't experiencing these issues at present, they should be accounted for by investors in the future.

Another risk is the speed at which telecommunications is changing. The company has a risk of not keeping on top of what's happening in their industry, and blunders in predicting where the market is heading have historically led to numerous businesses of this type going out of business.

Conclusion

If investors want to pick up an investment to shield their portfolio against the fear and volatility in the market, then one should consider buying BCE. It has solid revenue growth, a fair valuation, and high expected revenues for the future. I recommend this stock for both growth and value-minded investors as the stock still has plenty of upsides while also being a consistent earner.

This article was written by

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Articles are my opinions only and are not financial advice. You may seek appropriate personalized financial advice from a qualified professional to suit your individual circumstances.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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