2023-05-16 07:25:04 ET
Summary
- BCE is the largest Canadian telecommunications provider and has a nice BBB+ Credit rating.
- It has dual listings on the Toronto and US stock exchange with ~6% dividend yield.
- The 5-year dividend growth is ~5% which currently gives it an attractive inflation beating return.
- Caution, in my estimation, appears from the earnings being lower than the dividend payment, giving me some concerns for a sustainable rising future dividend.
- Prices, earnings and cash flows are discussed and a recommendation made.
BCE Inc.
BCE ([[BCE]], [[BCE:CA]]) operates as Bell wireless, wireline and media segments; was founded in 1880 and is headquartered in Verdun, Canada. It just announced combining its Bell Wireless and Bell Wireline operating segments to form Bell CTS/ Communication and Technology Services. Going forward, it will report those segment results under Bell CTS and Bell Media.
Earnings/Cash Flow
Current cash flows look good, but actual bottom line cash EBITDA is struggling. Most of the following information was obtained from this Zack's May 8th article . Prepaid mobile phone and net subscriber activations decreased owing to higher customer churn due to promotional offers on postpaid plans.
Adjusted EBITDA/Earnings Before Interest Taxes with Depreciation and Amortization added back… or basically what is left at the end of the year in the reported quarter was C$2,538 million, down 1.8% year over year. The downfall was due to a decrease of 36.5% in the media segment, which was partly offset by the increase of 1.3% in the CTS segment. The adjusted EBITDA margin was 41.9% compared with 44.2% in the prior-year quarter.
Bell Media generated revenues of C$780 million, falling 5.5% year over year. The revenues decreased due to lower subscribers and advertisers.
BCE generated C$1,247 million of cash from operating activities compared with C$1,716 million in the prior-year quarter. The free cash flow was C$85 million compared with C$716 million a year ago due to lower cash flows from operating activities.
2023 Outlook
BCE issued the financial guidance for 2023. It expects revenue growth between 1% and 5% and adjusted EBITDA between 2% and 5%.
Adjusted earnings per share are estimated to decrease 3-7% owing to lower tax adjustments and higher expected depreciation and amortization expense.
To me the report seems to be pointing to suspect lower cash flows and EBITDA.
FASTgraph
The following colors/lines on the "FG" chart shown below represent:
Black line = price.
White line = dividend.
Orange line = Graham average of usually 15 P/E "price/earnings" for most stocks.
Blue line = Normal P/E.
Dashed or dotted lines are estimates only.
Green Area represents earnings.
Statistics by year are noted for high and low prices at the top of the chart in black and for earnings and dividends at the bottom of it. The % shown is for the change from year to year for earnings with an E after any number representing an estimate. The FG below is for 4 past years and 2 future estimates.
The white line or dividend line definitely is running above earnings starting ~2020 and continues to be that way and even estimated to continue. Below is the performance over the last 5 years for the dividend in US$ and the PayOut ratio % in the last column; which indeed shows its over 100% for the last 3 years.
The amazing thing is the price was at a 52 week high during that time frame. How long that can continue is anyone's guess.
Price
The FASTgraph above also shows the price is at a P/E of 19.17x and the blue normal P/E is 17.75x which means it is overvalued.
The following are price targets from a few analysts:
- Value Line = $52 for out 18 months with a range of $42 - $63.
- Morningstar = $50 fair value and a cheap 5* buy price of $40.
- NASDAQ = median price of $48.63.
- CFRA (TDAm) = $40.70/ CDN $55.
Yahoo Finance Charts
First is the 5 year chart which shows ~$50 being the high until 2021 when it began to climb and hit $58 or so in June 2022. It was overvalued and that would have been the time to sell, but hindsight is always the best sight. Note it also goes down, an important fact, showing it is cyclical and can be bought lower if watched closely.
Below is a look at only 1 year price movement, showing the decline from that June 2022 high and again its cyclical nature.
The $47/ $48 price point seems to be where it meets resistance thus far in 2023. It has also fallen below $40 at the market low October 2022 and again near ~$43 in March 2023. I am not quite sure which way it is headed right now, but it looks down at the moment.
Dividend
5 year dividend growth using is 4.87%, it generally is ~5% using /CAD with the raise coming with the April payment. The 3rd quarter dividend was just announced to be the same as the April payment / CAD $0.9675; payable July 17 and going ex-div June 14 . The currency exchange would be ~$0.716 US and makes the yearly = US$2.81 or so giving it a forward yield of ~5.89%. Value Line mentioned the dividend does exceed its earnings, but the company can most likely afford it with lower pension payments anticipated and capital spending decreasing. I am not so sure, as none of that is actually known.
Seeking Alpha Quant ratings gives the dividend a C+ for safety, I give it a huge yellow caution light, if not now, but possibly next April, which might only be a smaller raise.
Summary/Conclusion
BCE being Canada's largest telecommunications and wireless provider especially in Ontario and Quebec, is a quality company to watch and own. It is, however, finding more competition from other media companies which challenge margins, which were decreased by promotions, higher network cost, and having to pay other carriers for roaming charges. All providers will have the same headwinds of higher interest costs and taxes, but they will need to be dealt with.
I like BCE, but believe it is riding near and bumping on a short term high and would anticipate seeing the price decline once again and even more so if the recession hits. Zack's have given it a sell #4 rank and I must agree with that at the $48 price or higher. I will consider owning it again if and when that lower cyclical price occurs and hopefully near $40.
Happy Investing to All!
For further details see:
Ringing The Canadian Bell: BCE - 6% Yield - To Hold Or Sell