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Can BCE Inc. Continue to Outperform?

BCE Inc. (TSX:BCE)(NYSE:BCE) is up 70% over the past five years, and new investors are wondering if this is a good time to start a position in the stock.

Let’s take a look at the current situation to see if BCE deserves to be in your portfolio.

Earnings strength

BCE delivered solid Q3 2015 results as net earnings attributable to common shareholders came in at $739 million, up 23.2% compared with Q3 2014. On a per-share basis, adjusted net earnings rose 22%.

Wireless revenues rose 9.3% to $1.772 billion and adjusted EBITDA for the quarter jumped 8.3%. The company continues to attract customers with nearly 78,000 net new postpaid subscribers added in the quarter. Wireless data revenues jumped 23.5% and product revenues rose 22.2% when compared with the same period last year.

The strong data consumption is pushing customer bills higher. BCE’s blended average revenue per user hit $65.34 per month, up from $61.59 in Q3 2014.

The cost of acquiring each mobile customer increased by $26 to $446 in Q3 2015 as a result of a higher proportion of postpaid customers in the activation mix.

BCE’s wireline segment held steady in the third quarter with year-over-year revenues and adjusted earnings essentially flat. The company is investing heavily in network upgrades and continues to roll out its fibre-to-the-home initiative. BCE signed up nearly 68,000 net new IPTV customers in the quarter, a 29% increase over Q3 2014. Net high-speed Internet activations came in at 58,000.

Bell Media continues to evolve in a challenging market. Year-over-year Q3 revenues increased 4.1% and adjusted EBITDA remained unchanged. The company owns a wide variety of media assets, which include sports teams, a TV network, specialty channels, radio stations, and an out-of-home advertising division. The new CraveTV streaming service helped increase subscriber revenues in the third quarter.

In an effort to trim costs, BCE is reducing its media staff by 380 positions, with most of the losses hitting production, editorial, and sales positions in the company’s CTV operations in Toronto and Montreal.

The media group has a ton of potential, but it will take some time to get all of the parts working together in an efficient way, and investors will have to see how the new pick-and-pay rules impact CTV and the specialty channels next year.

Cash flow and dividends

BCE remains a cash machine. The company generated free cash flow of $921 million in Q3, up 10.4% over the same period last year. Dividends only used up $551 million of that amount, so the company has ample room to increase the payout going forward.

BCE pays a quarterly dividend of $0.65 per share that yields about 4.6%.

Should you buy BCE?

The company enjoys a dominant position in an industry with few serious competitors, and that situation is unlikely to change. The stock currently trades at a reasonable 16 times forward earnings, and investors should see dividends grow with higher free cash flow.

Some analysts say the stock is near the end of its run because rising interest rates will put pressure on the telecom companies. I think strong dividend growth will offset any impact of rate moves, and BCE is still one of the few places investors can put their money without having to worry about volatility in the broader market.

At this point, the name still looks attractive for dividend investors with a buy-and-hold strategy.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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