2023-07-21 08:25:00 ET
Summary
- BCE Inc., the largest Canadian telecommunications company, is a good value play for investors and pays a high dividend yield.
- The company's wireless business and fiber buildout are its main long-term growth drivers, with plans to cover 85% of the country with its 5G service by year-end.
- Despite near-term risks from Hollywood labor negotiations, BCE's 6.4% dividend yield and attractive valuation compared to peers make it an attractive income play with upside potential.
It's easy to become jaded with the plethora of high yield options today, but it's important to keep in mind that these are truly exceptional times. While some may be content with getting a fixed rate of return on a bond, there is always reinvestment risk if those bonds mature in a lower rate environment.
As such, those who prefer to have more upside potential may want to consider quality equity holdings that could grow their payouts over time. This brings me to BCE Inc. ( BCE ), which I last covered here in February, highlighting its expanding coverage and fiber buildout.
The stock price has more or less languished since then, and it currently sits 3% below where it was when I last covered it. That's not bad news for value investors seeking to layer in capital and buildout a position on this stock. In this article, I provide an update on the business and discuss why it's a good value play at present.
Why BCE?
BCE is the largest Canadian telecommunications company, with multiple segments that include wireless, wireline, broadband, and a media arm that includes top channels in the country. Over the trailing 12 months, BCE generated $18 billion in revenue.
What sets BCE apart from its Canadian peers Rogers Corp. ( ROG ) and TELUS Corp. ( TU ) is its leadership position in wireless. Those who understand this business know that profitability stems from scale, and adding incremental customers come with little to no additional costs on the network. This economy of scale means that more customers equal higher profitability.
This, combined with BCE's moat-worthy media business, enables it to achieve an 'A' profitability grade with higher margins than peers ROG and TU. BCE's EBITDA and Net Income margins of 35% and 11%, sitting well ahead of the sector medians, as shown below.
BCE delivered respectable 3.5% YoY revenue growth during the first quarter. However, adjusted EBITDA declined by 1.8% YoY due to EBITDA margin compression of 230 basis points. This was driven in part by product mix, as lower high-margin media revenue was offset by higher low-margin product sales, as well as operating cost pressures related to inflation, strategic initiatives, and higher TV content costs.
Nonetheless, the main long-term story for BCE remains in its wireless business and fiber buildout as it seeks to deliver another 650K new direct fiber connections and seeks to grow its 5G service footprint to cover 85% of the country by the end of this year.
It appears that BCE's efforts have not been in vain, as total mobile phone and connected device net adds were up 20% compared to last year to 97K, and it added 47.8K new fiber to the home customers during Q1. All in all, BCE now has 2.5 million fiber customers, equating to 57% penetration of its total retail customer base.
Looking ahead, risks for BCE include the recent Hollywood writers and actors strike, which has resulted in new content production grinding to a halt. This could mean headwinds for BCE's media business through the potential for reduced number of subscriptions.
However, BCE's sports offerings, including its recently launched TSN+ sports streaming platform, could offset some of the potential declines as consumers may switch to watching more sports. BCE also has French language TV that is more immune to the Hollywood labor negotiations.
BCE's leverage is also somewhat high, with a net debt to TTM EBITDA of 3.85x. I would expect for the leverage ratio to trend down in the coming years as EBITDA benefits from the broadband and wireless subscription growth. Ratings agencies don't appear to be concerned, as S&P affirmed its BBB+ credit with stable outlook for BCE a few months ago. Plus, BCE carries a long average debt maturity term of 13 years and its after-tax cost of debt is just 2.9%.
Importantly for income investors, BCE currently pays a 6.4% dividend yield. The dividend is also well-covered by operating cash flow, with a 45% payout ratio based on trailing 12 reported months' data. The yield also sits at one of its highest levels over the past 10 years, as shown below.
Lastly, BCE represents decent value at its current price of $44.16 with an EV/EBITDA of 10.8, which sits materially lower than the 12.5 of competitor TELUS (Rogers' EV/EBITDA may not be comparable, as it's far higher at 26x), as shown below.
The valuation gap may not be entirely warranted, considering BCE's prime media assets and its aggressive fiber buildout strategy of its own. As such, I see the potential for BCE to trade 10-15% higher than where it is at now. This would equate to a dividend yield range of 5.4% to 5.8%, which would still be higher than BCE's historical range.
Investor Takeaway
BCE has solid long-term potential as it continues to invest in its fiber buildout, 5G network, and content offerings. While it does have near-term risks associated with the Hollywood labor negotiations, I view its long-term thesis as being intact. With a 6.4% dividend yield and attractive valuation compared to peers, BCE looks like an attractive income play with upside potential at the current level.
For further details see:
BCE: The 6.4% Yield Is A Gift For Income Investors