Telecom and media giant BCE (TSX:BCE) stock has gained a decent 10% in the last six weeks. Many rate-sensitive stocks have rallied higher on the hopes of the Fed’s changing stance. Telecom and utilities are some of these defensives that have gained a sheen of late, particularly ahead of the potential recession. Among the three-player-dominated Canadian telecom industry, BCE looks strong compared to its peers. Here’s why.
Dividend yield
BCE offers a handsome 6% yield — the highest among its peers. Its stable and predictable earnings facilitate regular dividend payments that stand tall in uncertain markets. It has increased its shareholder payouts for the last 13 consecutive years. Its low-risk business and regulated operations have set a solid footing for recurring cash flows, which allows it to raise the dividend, even when the broader economy is unsupportive.
Operational and financial growth
BCE increased its capital expenditure in the last few years, mainly to improve its network infrastructure. This will likely result in its wireless subscriber growth, ultimately boosting the top line. Its net income has grown by 3% compounded annually in the last decade. Though that’s very low, it is quite common in the saturated telecom industry.
Almost 50% of its revenues come from the wirelines segment, while 40% comes from the wireless segment. The rest comes from the media arm.
BCE’s blended ARPU (average revenue per user) came in at $59 per month last year. That’s marginally higher than the industry average. It’s a vital metric in the telecom sector and is calculated as total wireless revenue divided by the total number of subscribers.
Its strong wireless subscriber growth and recovery in roaming could drive earnings higher this year. BCE’s stable financial growth will most likely keep funding its dividend growth for the foreseeable future.
Balance sheet
At the end of the fourth quarter (Q4) of 2022, BCE had a net debt of $31.8 billion, taking its leverage ratio to 3.4. That’s the lowest compared to its peers and indicates a manageable debt. Importantly, its strong balance sheet seems well placed to fund its organic as well as inorganic growth.
In comparison, the second-largest telecom company by market cap TELUS has a leverage ratio of 4.3. Rogers Communications has it at around six. Rogers stock offers a dividend yield of 3%, while TELUS yields 5%.
Changing macroeconomic situation
The expected pausing of the interest rate hike cycle or even cuts will benefit telecom stocks. If the rates indeed decline, high-yielding telecom stocks will likely gain a sheen against bonds. Moreover, as telecom companies carry a lot of debt on their books, lower rates will lower their debt-servicing costs, ultimately improving profitability. So, an interest rate decline will likely boost telecom stocks. Notably, BCE has almost one-fifth of its debt exposed to variable rates.
Valuation
BCE stock is trading 22 times its earnings compared to the industry average of 22. This indicates that the stock is fairly valued against its peers. Such a multiple looks a tad exorbitant when compared to its slow growth and stable dividends. However, defensives like BCE will likely continue to command a rich valuation, given the recessionary environment and its dominating market position.
