Is Now the Right Time to Buy BCE Stock?

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

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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.

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