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2 Reasons to Avoid BCE Inc., and 1 Stock to Buy Instead

BCE Inc. (TSX: BCE)(NYSE: BCE) is a very popular stock to own, primarily among dividend investors. The company’s 5.0% yield actually ranks it among the top 5 in the S&P/TSX 60. And that’s a very strong yield for a company with such smooth earnings; normally, you’d have to venture into the energy patch to find such a yield.

But there are still reasons to avoid BCE. Below we detail two of them, and then reveal a name you should own instead.

1. A lack of growth

From 2011 to 2013, BCE’s revenue has increased by only 2.3% per year, and its net income has actually dropped. There are a few reasons for this.

For one, a chunk of BCE’s revenue still comes from wireline voice, which everyone acknowledges is a declining business, including the company itself. To its credit, wireline voice only accounted for 18% of revenue last year, down from 31% in 2008. But if you look at 2013, BCE lost over 500,000 wireline subscribers, which the company was unable to make up in other business lines — so the total subscriber count decreased by over 170,000.

Secondly, BCE has not done a good enough job of attracting new customers to its growth services. For example, its wireless business added only 100,000 subscribers last year, an increase of 1.3%.

Finally, the company pays out almost all of its income in dividends. To illustrate, last year it made $2.54 in earnings per share, and its dividend currently equates to $2.47 per share per year. Perhaps that’s why BCE spent far less than Rogers at Canada’s most recent wireless spectrum auction.

2. An expensive price

As of this writing, BCE trades at nearly 19 times earnings. This makes BCE the most expensive stock of Canada’s big three telecommunications providers. It’s also far too high a price for a company with flat revenues and shrinking earnings.

The fact is dividends are very popular in today’s investing climate, especially steady ones. So it should be no surprise that you have to pay up.

1 stock to buy instead: Telus

Telus (TSX: T)(NYSE: TU) is Canada’s third-largest telecommunications provider, and also benefits from steady revenue and limited competition. But there are some important differences between it and BCE.

For one, the company is growing both its subscriber count and its revenue. Last year, these numbers increased by 1.4% and 4.4%, respectively. Telus does not have such a significant wireline voice business, which helps. It also helps that Telus is adding more wireless subscribers than BCE, and is doing a better job of keeping them happy.

Telus also pays out less of its income to shareholders than BCE. Its annual dividend is only about 75% of last year’s earnings per share. Granted, this means Telus has a lower yield than BCE, at only 3.8%, but it also shows that Telus has more room to grow.

And best of all, Telus is slightly cheaper, trading at 17.7 times earnings. So when deciding between these two companies, the choice should be very clear.

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Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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