BCE Inc. (TSX:BCE)(NYSE:BCE) has pulled back to the point where the dividend now yields an attractive 5%.
Let’s take a look at the communications giant to see if it should be in your portfolio.
Wide moat
BCE is already a dominant force in the Canadian communications sector, but the business is about to become even stronger.
Why?
The company just received final approvals for its purchase of Manitoba Telecom Services (MTS). Once the deal closes, BCE will vault to the top spot in Manitoba and have a strong base in central Canada to expand its presence in the western provinces.
The MTS purchase is just one of a number of acquisitions BCE has made over the past several years with deals spread out across the telecom, media, and retail sectors, including sports teams, a television network, specialty channels, radio stations, equipment vendors, and an ad agency.
BCE also bought the remaining positions it didn’t already own in Bell Aliant and Q9 Networks.
When you combine all of these assets with the world-class mobile and wireline infrastructure, you get a business that interacts with most Canadians on a weekly, if not daily, basis.
In fact, anytime someone in this country sends a text, calls a friend, streams a movie, listens to the news, watches the weather report, or checks e-mail, the odds are pretty good that BCE is involved in the process somewhere along the line.
If you are looking for a business with a wide moat, this is one of the top picks.
Solid dividend
BCE recently raised its dividend based on expected free cash flow growth that doesn’t include accretion from MTS. The current quarterly dividend of $0.7175 provides a yield of 5%.
The company has a strong track record of dividend growth, and the distribution should be very safe.
Risks
The stock has pulled back amid concerns of rising interest rates in the United States.
Telecom companies tend to carry a lot of debt, so higher rates can increase their cost of borrowing. Rising interest rates can also close the gap between zero-risk yields and dividend yields, which can potentially cause a shift out of dividend stocks.
In addition, BCE trades at a multiple that is above its long-term averages, so there is a risk the stock could revert to historic norms.
Should you buy?
Value investors should probably look for other opportunities, but income investors who simply want a reliable name to buy and sit on for the long-term might want to consider adding BCE on any further weakness.
The stock has already pulled back enough that further downside should be limited by the attractive dividend yield, and there is a chance the market is getting ahead of itself on the interest rate fears.
A safer 5% yield is tough to find in the Canadian market today, and BCE tends to weather market downturns better than the broader index.
In an uncertain environment, such as the one we face today, BCE remains an attractive income pick.
