Why BCE Inc. Is the Most Expensive Telco Stock in North America

New reports from TD and National Bank say that BCE Inc. (TSX:BCE)(NYSE:BCE) shares are overvalued. So what should you do as an investor?

| More on:

There are few dividend stocks in Canada as popular as BCE Inc. (TSX:BCE)(NYSE:BCE). And it’s easy to see why. After announcing yet another dividend hike on Thursday, the company yielded a solid 4.6% by the end of the week. In today’s low-yield environment, it’s hard to find such a nice yield from such a stable company.

But not everyone is on board. On Monday, analysts at TD and National Bank both cut their rating on BCE to sell. Why did they do this? And how should you react? Below we take a look.

The valuation is just too high

Based on its recently posted numbers, BCE trades at a very healthy 19 times earnings. For many companies, such as those that are growing quickly, that’s not too unreasonable. But BCE operates in a very mature industry — to illustrate, its revenues have grown by only 3.5% per year since 2009.

To put this in a better context, BCE has traded at an average of 13.2 times earnings over the last decade. And the TD analyst pegged BCE as the most expensive telecommunications stock in all of North America. He sees no justification for such a high share price.

So why are the shares trading so high?

To BCE’s credit, the company has done some things very well. Subscriber numbers for its wireless, TV and Internet businesses are strong. Its free cash flow rose by 6.7% last year, including 23.6% in the final quarter. And the company has raised its dividend 11 times in the past six years.

But there’s another big reason why BCE shares have climbed so much: a lack of alternatives. To be more specific, a lot of dividend investors got burned recently as energy companies cut their dividends. At that point, many were looking for a safer option.

And if you screen for high-yielding dividends, BCE’s is probably the safest you can find. After all, only four companies on the S&P/TSX 60 have higher yielding dividends than BCE, and none of them make enough earnings to cover the dividend.

What should you do as an investor?

It’s clear that BCE has become very expensive and not entirely for the right reasons. But then again, it’s a very solid dividend stock with quite a nice yield. So what should you do?

Well, that depends on what your goals are. If you’re in retirement and are looking for some steady income, BCE stock is a great alternative to the incredibly low interest rates we’re seeing today.

But if you’re like me and are looking for longer-term growth, your best bet is to listen to these analysts and look elsewhere.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Investing

Arrowings ascending on a chalkboard
Tech Stocks

Why I Think Nuvei Stock Has Market-Beating Potential

Given its growth initiatives, expanding addressable market, and attractive valuation, I believe Nuvei has the potential to outperform the broader…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

A worker drinks out of a mug in an office.
Metals and Mining Stocks

5 Things to Know About Nutrien Stock in December 2022

Trading at heavily depressed multiples, Nutrien stock is a great opportunity, as it delivers solid financial results and an optimistic…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Shopify Stock Rose 15% in November: Is it a Buy Today?

Shopify (TSX:SHOP) stock rallied 15% this month but is still down 69% year to date, so should investors worry that…

Read more »

Man holding magnifying glass over a document
Investing

The 3 Most Oversold TSX Stocks to Watch Before 2023

Many oversold stocks are merely victims of market circumstances and potentially profitable bargains when they seem downtrodden.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »

Upwards momentum
Investing

Year-End Sales Tracker: 3 Growth Stocks Going for Value Prices

Growth stocks like Aritzia (TSX:ATZ) are on discount.

Read more »

Dollar symbol and Canadian flag on keyboard
Investing

2 Canadian Stocks I’ll Be Buying Hand Over Fist in 2023

Alimentation Couche-Tard (TSX:ATD) and another top growth stock could increase dividends in 2023.

Read more »