BCE (TSX:BCE) is down considerably in recent months. Contrarian investors who like big dividend yields are wondering if BCE stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
BCE stock
BCE trades for close to $51.50 at the time of writing compared to $65 earlier this year.
The drop is largely due to soaring interest rates, but BCE is also seeing a decline in advertising revenue in parts of its media group.
Rate hikes make borrowing more expensive for businesses that have large capital programs and use debt as part of their financing strategy. BCE spent roughly $5 billion last year on growth projects, including the expansion of the 5G network and the continued extension of the fibre-to-the-premises initiative.
These investments should drive revenue growth and will help defend BCE’s competitive position in the Canadian communications market. However, higher debt costs can put a pinch on profits. BCE’s guidance for 2023 anticipates a 3-7% decline in adjusted earnings per share compared to last year.
On the operational side, the company announced cuts of more than 1,000 jobs this year and closed some radio stations amid weakness in the media group. Customers who normally purchase advertising on the radio and television platforms are likely reducing marketing budgets to preserve cash, as inflation drives up costs. Others might be shifting ad spending to social media alternatives. BCE’s digital platforms have witnessed growth in ad revenue, but this has not been enough to offset the declines in the other media assets.
Opportunity for investors
The challenges facing the media group could continue, but overall revenue and free cash flow are expected to increase this year, driven by strong performances in the core mobile and internet businesses. This should support the dividend. BCE increased the distribution by at least 5% in each of the past 15 years.
Investors can now get a 7.5% dividend yield from BCE stock.
Is BCE stock a buy?
Ongoing volatility should be expected until the Bank of Canada indicates it is done raising interest rates in its effort to cool down the economy and bring inflation under control.
Additional downside in BCE’s share price is possible, but the stock already looks cheap and could rebound quickly as soon as investors are convinced that interest rates have peaked. In the meantime, investors get paid well to ride out the turbulence.
I would continue to hold the shares if you already own BCE stock. Investors with some cash to put to work might want to start nibbling while BCE is out of favour and offers an attractive yield.
