BCE Inc.: Will This Dividend Darling Regain its Momentum in 2018?

I’m sure you’ve heard the phrase “past performance is not an indicator of future results” a countless number of times, especially if you’ve invested in passive-investment products where the “warning label” is clearly expressed, like an image of rotting teeth on a package of cigarettes.

Such investment products were meant to make the lives of passive investors easier; however, like many things meant for good, they can be abused, especially by newcomers who back up the truck on what they believe is a “free ride,” only to set themselves up for disappointment should the performance of their investment suddenly fall or flat-line after years of volatility-free gains.

For many beginner investors who opt to create their own portfolios, they may end up chasing returns without even knowing it, especially when it comes to top-performing defensive blue-chips like BCE Inc. (TSX:BCE)(NYSE:BCE). Because it’s a defensive stock, many investors may believe that the company is a “free lunch” with the stock at the core of their portfolios. It’s go defence and above-average total returns — what’s not to love?

Sure, the company has a low beta, but just because a stock is defensive and has performed well in the past doesn’t mean the road ahead will be a smooth ride into the green. In fact, the case of BCE, I think investors who have grown attached to the stock will stand to be severely punished, as competition in the Canadian telecom scene escalates to levels that we’ve never seen before. Add a rising interest rate environment, and it’s looking like BCE shares could be due for a prolonged period of underperformance.

The stock currently trades at a 17.3 price-to-earnings multiple, a 3.3 price-to-book multiple, a 2.2 price-to-sales multiple, and a 6.9 price-to-cash flow multiple. All are relatively in line with the company’s five-year historical average multiples of 17.6, 3.7, 2.1, and 7.5, respectively. While it may seem like the stock is a fair value at current levels, investors need to consider the massive long-term headwinds that the company will be facing over the next five years. When taking them into account, I think the stock deserves to be a lot cheaper, even after the recent ~11% peak-to-trough decline.

The dividend is completely safe and will likely continue to grow; however, when it comes to total returns, I think investors should get used to years where the stock remains flat or even falls by a double-digit percentage.

If you’re comfortable with this and you’re an extremely long-term investor who’s willing to ride it out, you should at least do some trimming to raise cash for other opportunities that offer substantially greater value than BCE.

For everybody else, I think it’s time to completely throw in the towel on the name, as there are likely many investors who are unrealistically expecting BCE to regain the momentum it experienced prior to August 2016.

Stay hungry. Stay Foolish.

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

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