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Income Investors: Is BCE Inc. Still a Top Dividend Stock?

BCE Inc. (TSX:BCE)(NYSE:BCE) is a top pick for many income investors and retirees who seek dividend stability. The company is a dividend-growth king, but as Canada’s largest communications company, it’s becoming hard to grow by a meaningful amount as the stock stagnates. BCE is definitely a smart play for those who looking to play defence, but I think long-term returns are likely to be modest.

BCE has some terrific assets and a huge moat. The wireless infrastructure is top notch, and it would take a tonne of capital and many years to construct a network to compete with BCE. BCE and its peers in the Big Three have formed an oligopoly as they controlled roughly 85% of the Canadian market. Unless a subscriber encounters issues throughout their contract, they probably don’t have any real incentive to switch wireless providers. This may soon change as a fourth major wireless provider looks to steal subscribers away from the Big Three.

The defensive sector has been underperforming of late, and BCE has certainly felt the effects, as its stock has been relatively flat for over a year. Despite this underperformance, the stock still appears to be expensive, especially when you consider the headwinds the company will face over the next few years.

With a fourth major player entering the wireless space, BCE is going to face pricing pressures as the management team does everything it can to stop subscribers from jumping ship. It’s possible that we’ve seen peak subscribers at BCE, and this may be the real reason why Prem Watsa dumped his stake last year.

Valuation

BCE trades at an 18.62 price-to-earnings multiple, a 3.7 price-to-book multiple, and a 2.4 price-to-sales multiple, all of which are higher than the company’s five-year historical average multiples of 16.7, 3.6, and 1.9, respectively. Defensive stocks have been going out of favour since Donald Trump’s presidential victory because everyone has suddenly become bullish, so why does BCE still trade at a premium?

Some may argue that BCE is cheaper relative to some of its peers, but not when you consider growth prospects. I don’t see any medium-term catalysts that will propel BCE higher. I believe BCE could continue to remain flat for at least another year or so. The dividend is quite high at 4.69%, but it’s still lower than BCE’s five-year historical average yield of 4.9%.

Unless you’re an extremely cautious investor who’s worried about a market correction, I would probably recommend looking elsewhere for value.

If you’re a long-term investor who owns shares for the income, then I’d recommend holding and waiting for a better entry point before buying more.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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