Buying stocks when they top recent highs is a popular strategy employed by many successful investors.
Let’s take a look at a large Canadian company that is enjoying a nice rally right now and see if it could extend the run through the end of the year.
BCE
What a difference a year can make when it comes to investor sentiment towards boring, old dividend stocks. When the Bank of Canada and the United States Federal Reserve had the pedal to the metal on interest rate hikes, everyone wanted nothing to do with BCE (TSX:BCE)(NYSE:BCE). The stock dropped from a 2016 high of $63 to as low as $51 last fall.
The theory for the dip is that higher interest rates make debt more expensive, and BCE uses quite a bit of debt to finance its massive network upgrades. As interest rates rise, the amount of cash flow allocated to service debt might also increase, leaving less available for dividends. In addition, higher interest rates tend to push up the returns on safer investments, including GICs, and that can trigger a flow of funds out of BCE and other dividend stocks.
The market obviously got ahead of itself, and as things started to cool off on the rate-hike front, money began to move back into BCE. Today, the stock is back above $61 per share, and it wouldn’t be a surprise to see it blow through the 2016 high and take a run at $65 by the end of this year.
Why?
Market uncertainty surrounding the ongoing trade war between the United States and China is driving money into government bonds. This is pushing down yields and subsequently putting additional pressure on the rates offered on things like GICs. For example, you could get a five-year GIC that paid 3.5% last fall. Today, it’s tough to find one offering 2.5%.
In addition, analysts are increasingly predicting a rate cut south of the border by the end of the year. If the Fed decides to lower interest rates to combat a weakening economy, the Bank of Canada would likely follow suit.
In this environment, BCE is poised to benefit from more money seeking higher yield. Even after the nice run this year, the stock still provides a 5.1% dividend yield.
The company raised the payout by 5% for 2019, and a similar increase should be on the way next year, supported by anticipated 2019 free cash flow growth of 7-12%.
Should you buy?
The company continues to grow revenue and earnings at a slow and steady rate. At the same time, free cash flow is rising nicely. If you want a stock you can simply buy and forget while you collect an above-average yield, BCE might be an interesting pick today.
