Is Now the Right Time to Buy BCE Stock?

BCE stock should hold up well during a recession. Are the shares now undervalued?

| More on:
edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

Image source: Getty Images

BCE (TSX:BCE) is down amid the broader market correction that hit stocks through the second half of 2022 and picked up steam again in recent weeks. Contrarian investors who look for deals on top dividend stocks are wondering if BCE is now undervalued and good to buy for a Tax-Free Savings Account (TFSA) focused on passive income or a self-directed Registered Retirement Savings Plan (RRSP) targeting total returns.

BCE overview

BCE is Canada’s largest communications company with a current market capitalization near $55 billion. The stock traded above $70 last spring but is now below $61 at the time of writing.

The extent of the pullback appears overdone. BCE gets most of its revenue from internet and mobile subscriptions. Commercial and retail customers need to have these services, regardless of the state of the economy. As such, there shouldn’t be a large impact on the revenue stream from the wireline and wireless network services if the economy goes into a slump.

That being said, BCE isn’t immune to an economic downturn. When times get tough, people and businesses will hold older phones for longer. This can have a negative impact on revenue from the sale of new devices. BCE also has a large media business with a TV network, specialty channels, radio stations, and online platforms that rely on advertising revenue. Companies often trim their ad budgets when they need to tighten their belts during a recession. This was evident during the pandemic and would be expected to occur if the Canadian economy goes into a deeper downturn than is expected this year or in 2024.

Rising interest rates help BCE generate better returns on funds invested in fixed-income assets inside its pension fund, helping reduce top-up contributions. However, higher interest rates will also drive up borrowing costs. BCE uses debt to fund part of its capital expenditures and rising interest expenses can reduce cash flow available for distributions if revenue gains do not offset the increase. BCE has the power to raise its prices when it needs to increase revenue to cover higher costs, but the steep increase in interest rates over a short time period in the past year will put pressure on 2023 results.

In fact, BCE expects adjusted earnings per share to slip 3-7% in 2023 compared to last year as a result of increased interest expenses, among other things. However, revenue is expected to rise 1-5%, and free cash flow growth is targeted at 2-10%.

This means investors should see another solid dividend increase in 2024. BCE raised the payout by 5.2% for 2023, marking the 15th consecutive annual increase of at least 5%.

Is BCE stock good to buy today?

BCE currently provides a 6.3% dividend yield with good prospects for steady payout growth in the coming years. The revenue stream should hold up well during a recession, and investors get paid well to wait for a rebound in the market.

Additional downside is certainly possible in the near term, but investors seeking reliable passive income and a shot at decent total returns might want to consider adding BCE to their TFSA or RRSP at this level and look to boost the holding on any further weakness.

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. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

4 Fabulous Dividend Stocks to Buy in July

Are you looking for long-term income? These four dividend stocks should not only provide you with value in July but…

Read more »

financial freedom sign
Dividend Stocks

5 Steps to Financial Freedom for Canadian Millennials

Follow these steps and nothing can stop Canadian millennials from achieving their early retirement dreams.

Read more »

Investor wonders if it's safe to buy stocks now
Dividend Stocks

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

For a bet on the aging population, consider this small-cap stock with growth potential.

Read more »

Growing plant shoots on coins
Dividend Stocks

Yield Today, Growth Tomorrow: 3 Stocks to Keep Building Your Wealth

For investors seeking yield today and growth tomorrow, these top Canadian dividend stocks are certainly worth considering right now.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 10.72% Dividend Stock Pays Cash Every Month

This dividend stock remains a consistent, defensive dividend producer that will give up over 10% in income each and every…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Investors: 2 Standout Domestic Stocks With 7% Yields

These top dividend-growth stocks look oversold.

Read more »

Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Despite their recent declines, the long-term growth outlook of these two top dividend stocks remains strong, which could help their…

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Growth Stocks vs. Value Stocks: Which Should You Choose?

There are growth stocks and value stocks, but there are also growing value stocks that fit into both sides of…

Read more »