The past few days have been pretty confusing for investors of BCE Inc. (TSX: BCE)(NYSE: BCE) after it announced that it was going to be issuing more equity for $750 million in cash. Why would a company that is making considerable cash flow and seeing growth as more consumers demand its services suddenly looking to raise money?
And most importantly, why would it dilute investors by issuing 13,140,000 shares? The company doesn’t need the cash. And with all of this dilution taking place, should investors avoid the company?
To answer the why it raised the money, all you have to do is look at the price of the stock. It is incredibly overvalued, with many retail investors buying it because they want the consistent dividend. When something is overvalued, it is a smart move to sell. And that’s exactly what BCE is doing.
With the $750 million, BCE can do a few things. Perhaps it has an investment in mind that it wants to make or it wants to pay down debt, which would be a smart move. It currently holds $20 billion in outstanding debt, so paying down some of that would be beneficial.
Or perhaps it wants to keep the money and wait for the stock to drop more. Warren Buffett doesn’t believe in his company paying a dividend or buying back shares unless the value of those shares is so underpriced that he can’t help but make the move. If the price of BCE drops considerably on this news, BCE might buy all of the shares back–plus more–to decrease the size of the pool.
No matter what the company is planning, I don’t believe that this move is detrimental to investors because this is a pure dividend play. Because the company generates significant operating cash flow, it is able to pay tremendously lucrative dividends to its investors.
At present-day prices, BCE pays a 4.48% yield, which is $2.60 a share per year. That is an incredible yield for a stock that is overvalued.
The reason it can afford to do this is because it is such a well-diversified telecommunications company that offers everything its customers want.
We use our mobile phones more and more every year, which requires more data. BCE offers that. Everything is now connected to the Internet, so BCE offers that, too. And while there has been a trend in cord cutting, there are still millions that pay for television. BCE offers that.
Further, because BCE doesn’t have to worry about another company launching its own competitive product, BCE can spend more money on dividends and less on defensive positioning.
The reality is this … BCE diluted investors by $750 million. But I don’t believe that this will harm investors in the long term. The dividend is tremendously lucrative, it is incredibly stable, and if the company continues to grow, the dividend will follow suit. Therefore, I still believe investors can expect generous income from the company and should buy this stock.
