BCE (TSX:BCE) is trading at levels not seen since the depths of the 2020 market crash. Contrarian investors seeking passive income and a shot at decent capital gains are wondering if BCE stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) portfolio.
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BCE stock
BCE trades near $51.50 at the time of writing. This is down from $65 in May and above $70 at the peak in 2022.
The drop is primarily due to the sharp increase in interest rates that has occurred, as the Bank of Canada battles to get inflation under control by taking some momentum out of an overheated economy and a very tight labour market. Higher interest rates are starting to hit businesses and households that are carrying too much debt. The result should be a slowdown in discretionary spending, which should cool off price hikes and reduce upward pressure on wage demands.
The September 2023 inflation rate came in at 3.8%. That’s down from 4% in August but still well above the 2% target.
BCE uses debt to pay for part of its capital program. The company spent about $5 billion in 2022 on projects that include the 5G network and the extension of fibre-optic lines to the premises of BCE customers. These initiatives should help drive future revenue growth and help protect BCE’s competitive position in the Canadian market.
Higher borrowing costs, however, are putting a pinch on profits. The Bank of Canada will eventually have to lower rates again to avoid triggering a deep economic downturn. Economists have different views on when that might occur, with predictions ranging from early 2024 to 2025.
Dividend safety
BCE increased the dividend by at least 5% in each of the past 15 years. Investors might not see hikes that large in the next couple of years, but the current distribution, at the very least, should be safe, supported by the solid mobile and internet business lines.
At the time of writing, BCE provides a 7.5% dividend yield.
BCE upside?
Near-term pressures are expected to persist, but the stock is probably oversold at this point.
BCE’s core mobile and internet subscription businesses provide essential services that people and companies need, regardless of the state of the economy. Strength in these groups is expected to drive revenue growth in 2023 compared to last year, even as BCE’s media business struggles with falling ad revenues across the television and radio assets.
As soon as the Bank of Canada signals it is done raising interest rates, there could be a rush of funds back into high-yield stocks, including BCE.
Is BCE a buy?
Additional downside is certainly possible, but contrarian investors with a buy-and-hold strategy might want to start adding BCE to their portfolios while the stock is out of favour. New buyers get paid well to ride out the near-term turbulence and will be in a good position to potentially generate decent capital gains on the next recovery.
