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Dividend Investors: Is it Time to Buy BCE Inc.?

BCE Inc. (TSX:BCE)(NYSE:BCE) has fallen 10% since hitting its recent high of $60 per share. Dividend investors who missed the rally have welcomed the pullback, and many are wondering if now is the time to buy.

Let’s take a look at BCE to see if you should add the company to your portfolio.

Earnings and cash flow

BCE Inc. reported Q4 2014 earnings of $0.64 per share, a 9.5% increase over the same period in 2013. For all of 2014, net earnings attributable to shareholders were $2.98 per share, up nearly 20% compared with 2013.

Free cash flow generated in Q4 hit $833 million, a 24% increase over 2013. The growth was driven by higher EBITDA and lower capital expenditures.

For 2015, BCE is forecasting adjusted earnings per share of $3.28-3.38 and free-cash-flow growth of 8-15%.

Dividend and share price appreciation

BCE recently increased the dividend by 5.3% to $2.60 per share. The distribution currently yields about 4.8%. The 10-year annualized dividend growth rate is 7.5% and the stock price has doubled over that time frame.

Business outlook

The company has been Canada’s communications leader since 1880, and BCE continues to expand its dominant position in the market.

Investments in high-speed fibre, mobile 4G and LTE networks, and high-capacity data centres have positioned BCE well to profit from the continuous evolution in the way people communicate and consume content.

The company has also spent billions on strategic acquisitions, including the CTV television network, Maple Leaf Sports and Entertainment, Astral Media, and wireless retailer Glentel.

Subscribers continue to pay up for high-speed access to their favourite content, but BCE is still having trouble growing some of the advertising revenues.

Risks

Competition concerns about a fourth national player are probably overblown.

It’s unlikely that an international company would spend the billions required to build a competitive network, especially given Canada’s relatively small market size. If an internal competitor emerges, customers probably won’t see much price relief. Either way, BCE is so well entrenched at this point that it is more than capable of holding its own.

Interest rates could be a concern for BCE because rising rates tend to cause investors to exit positions in dividend stocks. The next move in rates in Canada will probably be lower, and the economic outlook suggests that Canadian interest rates will remain at historically low levels for the foreseeable future.

Should you buy?

Dividend investors have limited high quality choices in the Canadian market, and BCE’s generous distribution is probably among the safest on the S&P/TSX 60. The company’s earnings and free-cash-flow growth should ensure continued increases to the payout.

Given the recent pullback, this is probably a good opportunity to add the stock to your portfolio. However, BCE’s shares are not cheap. The company trades at 15 times forward earnings and 4.1 times book, putting BCE’s value at the high end of its historical range. As long as interest rates remain low, BCE should continue to enjoy a premium valuation.

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

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