BCE Inc. (TSX:BCE)(NYSE:BCE) continues to reach new highs, and investors are wondering how much fuel is left in the tank.

Let’s take a look at the Canadian telecom giant to see if more upside could be in the cards.

Steady earnings

BCE delivered Q1 2016 earnings of $0.85 per share, a slight gain over the same period in 2015.

The company saw its mobile blended average revenue per user (ARPU) rise 3.6%, driven by heavier traffic on the company’s 4G LTE network. Wireless revenue is a big focus for BCE, and smartphone users are apparently gobbling up more data.

On the residential side, BCE continues to roll out its popular Fibe TV offering, and the service had 24% more users in Q1 than it did in the same period last year. That wasn’t enough to offset the impact of slow economic growth and competitive pricing as year-over-year wireline revenue fell 1.5%.

BCE’s media division now accounts for 12% of total revenue. The company continues to cut costs and streamline operations amid a rapidly changing landscape, and market observers are eager to see how the new pick-and-pay TV rules will impact the media group over the next few quarters. The division reported a 2.1% revenue gain in the first quarter.

All-in, the latest results don’t really support a big move in the stock.


BCE expects to generate $3.45-3.55 in adjusted earnings per share this year. Free cash flow growth is going to be 4-12%, and the generous dividend remains within the target payout ratio of 65-75% of free cash flow.

Revenue growth is forecast to be 1-3% in 2016 and EBITDA growth is expected to be 2-4%.

Again, the numbers are steady but not enough to justify the rally.

Stock appreciation

BCE’s stock has been on a roll since the end of the Great Recession, and while the revenue and earnings results don’t inspire much confidence in potential further upside, there are other factors at play.

BCE is viewed as a safe-haven investment with a very attractive dividend. The stock is hitting new 12-month highs, but the yield is still 4.4%. That puts it on par with the big banks.

As investors contemplate the potential fallout of the Brexit vote, a possible financial meltdown in China, and continued global unrest, BCE is one of the few stocks that Canadians can reasonably trust to weather the storm.

Shocks to the financial markets are also keeping interest rates at record-low levels, and that tends to be good for BCE because the stock attracts more investors who would otherwise put their money in fixed-income assets.

How high could it go?

At the time of writing, BCE is trading just shy of $62 per share. That translates into 19.6 times trailing earnings, which is pretty expensive when compared to historical data. The five-year average is about 15.6 times earnings.

Some analysts feel the stock is going to correct in a big way, but I suspect the market is pricing BCE and its peers with the expectation that record-low interest rates are going to stay with us for a long time. If that turns out to be true, the current PE ratio could become the new normal.

Investors should buy this stock for the dividend and not the anticipation of capital gains, but I think BCE could drift up toward the $70 mark over the next two years if the outlook for interest rates remains negative.

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