2023-10-16 13:10:33 ET
Summary
- BCE Inc. is a Canadian telecom giant that has generated strong shareholder returns over the past 5 years, outperforming its American and Canadian peers.
- BCE's growth story is based on its 5G rollout and aggressive fiber-to-the-home rollout, which is expected to reach a large portion of the Canadian population.
- Despite its near-term share price underperformance, BCE saw revenue and adjusted EBITDA growth in the second quarter and projects full-year growth, supporting its dividend growth.
Now’s a great time to be an income investor, and investors don’t have to work double-time to try and uncover hidden gems, especially with many quality players paying high yields sitting out in the open. Such I find the case to be with BCE Inc. ( BCE ), which I last covered here back in July with a ‘Buy’ rating, noting its fiber buildout and value price.
Like its U.S. counterparts Verizon ( VZ ), and AT&T ( T ) as well as other income sectors such as REITs, BCE has fallen in price since my last coverage as dividend stocks have fallen out of favor relative to growth stocks. As shown below, BCE now trades close to its 52-week low and yields 7.5%. In this piece, I provide an update on the business and discuss why BCE is a terrific buy at present for patient investors.
Why BCE?
BCE is a Canadian telecom giant with a collection of assets that span wireless, internet, TV, and media, generating $18.6 billion in revenue over the trailing 12 months. Perhaps unbeknownst to some investors, BCE has actually generated strong shareholder returns over the past 5 years relative to peers, as reflected by its 25% total returns.
This surpasses that of high dividend paying American peers Verizon and AT&T, as well as that of its Canadian peers Telus ( TU ) and Rogers ( ROG ), as shown below.
BCE vs. Peers' Total Return (Seeking Alpha)
BCE’s growth story is predicated upon its 5G rollout and value proposition to consumers, as well as its aggressive fiber-to-the-home rollout across population dense regions of Canada. This year, it’s on track to deliver 650K new direct fiber locations, which is significant for Canada’s 39 million population, and considering that many households contain more than one person. In addition, BCE’s 5G and 5G+ rollout is expected to reach 85% and 46% of the population, respectively, by year-end.
Meanwhile, BCE’s near-term share price performance may lead one to believe that the business is doing poorly. That, however, doesn’t appear to be the case, as BCE saw 3.5% YoY revenue and 2.1% YoY adjusted EBITDA growth during the second quarter. This was driven by the highest Q2 Internet net additions in 16 years and an impressive 20% digital media revenue growth. Importantly, BCE’s bread and butter wireless business saw 4.4% YoY revenue growth driven by accelerating net additions. As shown below, BCE projects full year EBITDA and Free Cash Flow growth for the full year, supporting its 5.2% dividend growth over last year.
Investor Presentation (Figures in $ CAD)
One of the news events that impacted the share prices of AT&T and Verizon and likely BCE to some extent in recent months is the existence of legacy lead-sheathed cables which may pose an environmental risk. However, BCE management noted that it began transitioning away from covered copper cables in the 1960s when they began deploying plastic polymers in place of lead, and since the mid-2000s, began replacing these copper cables with fiber. At present, management noted that lead-covered cables represent just 0.36% of its network, and thereby I don’t think this poses a significant risk to the company.
Risks to BCE include higher debt, with long-term debt having grown by $2.7 billion since the end of 2021, as the company pursues its aggressive fiber build out strategy. At present, BCE’s net debt to unadjusted EBITDA sits at 3.87x, which sits slightly above that of high-yielding Verizon’s 3.7x and AT&T’s 3.66x. I would expect for leverage to trend down as capital intensity winds down (as shown in the earlier table) and as fiber revenue grows. It’s worth noting that BCE carries a decent BBB+ credit rating from S&P.
Meanwhile, BCE currently yields an attractive 7.5%, and the dividend is well-covered by a dividend-to-operating cash flow of 46.5%. As shown below, BCE’s yield now sits at the highest level in at least 10 years.
Turning to valuation, I see solid value in BCE at the current price of $37.84. This is based on the following NPV analysis, which bakes in the current year expected EPS, combined with a modest 5% growth rate and a 2% discount rate, arriving at a fair value of $47.15. This equates to a potential 25% upside and it sits just above the average analyst price target of $45.86 and below the high end of the target range of $48.66.
NPV Analysis (Produced by Author)
Investor Takeaway
Investors can now buy this stable telecom giant, which sports a growing dividend near an all-time high yield level at an attractive price. With a growth story underpinned by its fiber and 5G rollout, growing free cash flow generation, and solid dividend coverage ratio, I believe investors can expect shares of BCE to continue delivering attractive total returns over the long term. I see solid total return potential of 25% plus the 7.5% yield, and am therefore upgrading BCE stock to a 'Strong Buy' based on valuation for dividend income investors.
For further details see:
BCE: A Smart 7.5% Yield With 25% Upside Potential