Is BCE Stock too Expensive?

BCE is enjoying a big rally in 2021. How high could the stock go before it corrects?

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BCE (TSX:BCE)(NYSE:BCE) surged 20% so far in 2021 and investors who missed the sharp rally are wondering if more upside could be on the way, or if the stock is now overbought.

BCE earnings

Canada’s largest communications company reported solid Q2 2021 results. Operating revenue increased by 6.4% compared to Q2 2020 hitting $5.7 billion. Adjusted EBITDA increased 6.2% to $2.5 billion. Adjusted net earnings came in at $751 million, representing a 31% increase over the same period last year.

BCE’s free cash flow for the quarter was $1.25 billion, which is down 22.5%, but still robust enough to support the generous dividend. The balance sheet remains strong with BCE reporting $5.3 billion in available liquidity at the end of the second quarter, including $1.75 billion in cash and cash equivalents.

The company added 44,000 net postpaid mobile phone subscribers and saw retail internet fibre net additions top 27,000, up 80%. Residential internet revenue increased by 12%. Total wireless operating revenue increased 10.7%, driven by higher revenue from both products and services.

Total wireline revenue slipped 1.3% with product revenue down 11% primarily due to lower sales of data gear to government clients.

BCE’s media group saw operating revenue increase 30.4% in the quarter compared to Q2 last year. The pandemic hit the division as advertisers cut spending and sports teams played in front of empty arenas. The recovery in ad spending is occurring across the TV, radio, and digital media platforms. Interestingly, digital revenues now make up 19% of the total revenue for Bell Media.

BCE confirmed its guidance for the year. Revenue and EBITDA are expected to grow 2-5%. Adjusted earnings per share growth should be 1-6%. Free cash flow for the full year is targeted at $2.85-3.2 billion.

Growth

BCE recently spent $2 billion on a new spectrum to support its 5G network expansion. The company also continues to invest in its fibre-to-the-premises program. This ensures BCE’s clients have the broadband access they need and helps BCE protect its competitive moat.

The extensive customer base provides opportunities for add-on revenue streams such as remote monitoring and security services. Businesses and households continue to consume more data across all their connected devices and that should lead to higher revenue.

As travel restrictions ease, BCE should also see a rebound in roaming charges.

Dividends

BCE pays an annualized dividend of $3.50 per share for a yield of 5.3% at the time of writing. Despite the large investments being made in the 5G and fibre networks, free cash flow remains solid and investors should see the dividend continue to drift higher.

Risks

As long as interest rates remain low BCE’s stock should attract buyers. However, investors need to keep an eye on inflation and see where the Bank of Canada is headed with interest rate hikes. Communications and utility stocks often take a hit in a rising rate environment. We saw this in 2018 when interest rates moved higher.

In the event, the central bank is forced to boost interest rates sooner than expected and by a larger amount, BCE’s share price could come under pressure.

Is the stock getting too expensive?

BCE trades for $66.75 per share at the time of writing. The stock has definitely enjoyed a big run this year, so a pullback should be expected, especially if the broader TSX Index corrects.

I wouldn’t back up the truck today, but income investors searching for reliable above-average dividend yield should be okay to buy the stock here for a buy-and-hold portfolio and maybe look to add on weakness. Trying to call a top or bottom is difficult, and BCE could easily extend its rally to $70 per share before we see a correction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker owns shares of BCE.

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