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Will BCE Inc. Let Me Sleep Well at Night?

Each investor has different risk tolerances. It’s possible to have different portfolios for different risks. That’s how I am. In one portfolio, I’m very risky, holding a nice chunk of Bitcoin. In another, I invest in p2p loans, which kick off great cash flow. And in another, I like to own stocks that are considered safe. As one financial writer who I follow regularly asks, “Is this a SWAN (sleep well at night) stock?”

That’s the same question I’m asking now about BCE Inc. (TSX:BCE)(NYSE:BCE). If I buy shares of BCE, will I go to bed every night and sleep well? Or is BCE the kind of stock that will keep me up? With a company like BCE, that all depends on whether or not the dividend is secure.

So, let’s dive in.

BCE reported operating revenues of $5.7 billion in Q4 2016, up 1.8% year over year, which is to be expected because it is an enormous company, so really moving the needle is hard. However, its net earnings increased by 29% to $699 million from $542 million in Q4 2015. And its net earnings attributed to common shareholders was up to $0.75 per share from $0.58 last year.

The company credited a decrease in severance, acquisitions, and other costs associated with “higher wireline and media workforce restructuring costs in Q4 2015” for the boost in earnings; however, even if we don’t look at those costs, adjusted net earnings were up 8.5% to $667 million compared to $615 million a year earlier.

Then there’s the significant increase in cash flow year over year. In 2015, the company brought in just shy of $3 billion in cash flow; fast forward to 2016, and that had grown to $3.23 billion in free cash flow. This 7.6% increase is incredibly important because dividends can only be paid with the cash in the bank, so if this cash weren’t growing, I’d be concerned.

Another number to look at is the payout ratio, which dictates how much of the net income the company is paying out. According to Morningstar, as of December 2016, BCE had a payout ratio of 85%, which means for every dollar it earns, $0.85 goes to investors. But with cash flow increasing so much, I’m not too concerned about this.

And that increase in cash flow is especially good news because management increased the dividend by 5.1%, or a $0.14 per share increase, to $2.87.

Unfortunately, not everything is perfect for BCE. It is currently sitting on US$21.5 billion in debt, according to Morningstar. Obviously, if this debt isn’t handled, it could come back to hurt the company; however, quite a bit of the debt doesn’t come due until next the decade, not to mention it’s operating on a fixed interest rate, which gives the company more than enough time to pay the debt down.

So, the question stands: Is BCE a SWAN? For the most part, yes. While the debt does concern me, I think the company can manage it, especially with operating revenue, income, and cash flow all increasing. And with the dividend increasing, you can sleep well knowing your portfolio is working for you.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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