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Why the Pains at BCE Inc. (TSX:BCE) Are Just Getting Started

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BCE (TSX:BCE)(NYSE:BCE) is a darling that’s loved by many conservative income investors. Since the depths of the Great Recession, the stock has delivered a generous upfront yield, consistent dividend growth, and above-average capital gains. In spite of this, investors need to be asking “what have you done for me lately” when it comes to market darlings turned dividend duds like BCE.

The stock has been a huge laggard over the past two years. In many previous pieces, I’ve urged investors to break-up with the telecom behemoth as a substantial amount of pain would be on the horizon despite being considered a “safe” name that’s immune to considerable downside.

At the time of writing, BCE is down over 18% from all-time highs and is flirting with bear market territory (a peak-to-trough decline of +20%) as interest rates continue to take off. Last summer, I emphasized three macro and microeconomic headwinds that led me to believe that BCE was a strong sell and that shareholders should throw in the towel.

The three headwinds cited in my previous piece were: slowed growth, increased competition (and implied subscriber losses), and a higher interest rate environment.

The third headwind is common to not only all telecom stocks, but many other stocks within the “RUT” (REIT, utilities, telecom) basket. It’s a macro concern, and there’s no way around it.

The other two headwinds in slowed growth and increased competition were company-specific and industry-specific headwinds, respectively. Going down the top-down analysis ladder, BCE didn’t only look like an unfavourable investment, but given the headwinds, the stock wasn’t cheap, even after the +18% sell-off that got the stock where it is today.

The stock trades at a 17.2 trailing P/E, a 2.0 P/S, and a 6.3 P/CF, all of which aren’t substantially lower than the company’s five-year historical average multiples of 17.5, 2.1, and 7.5, respectively. Shares are slightly cheaper than historical averages.

However, when you consider the fact that BCE’s problems extend beyond just rising rates, I’d say there’s much more downside, especially after long-term headwinds have the opportunity to produce a dent into the company’s future financial results.

You could argue that a higher rate environment is already baked into shares, but slowed growth and increased competition are nowhere near baked in. These insidious headwinds probably won’t cause a violent collapse in BCE stock. Rather, they’ll have a slower, insidious impact on the stock over the course of many years.

BCE is an absolute behemoth, and although the company can continue to grow via acquisition, the increased cost of borrowing will continue to lead to less-than-stellar ROE numbers, which are on the downtrend over the past two years.

BCE is an aircraft carrier sized company, and as competition picks up, we’re bound to see top and bottom-line pressure as management is forced to cut costs to remain competitive.

Add BCE’s legacy assets into the equation and you’ve got a dud that I believe will continue to underperform its Big Three peers.

Foolish takeaway

BCE stock is a by fave among retirees. And although the dividend yield is attractive at 5.8%, I think the yield could swell to 7% as BCE’s other headwinds start to catch up with a company whose stock I believe could be in for 10-15% further downside over the course of the next two years.

If a stable telecom is what you’re after, I think you’d be better off with any one of BCE’s peers at this juncture.

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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