BCE (TSX:BCE) is one of those stocks that offers a lot of yield but hasn’t really gone anywhere. Its yield at today’s prices is 7.2%, yet its stock is actually down over a full five-year period. If you’d bought at the end of 2018, you’d have paid $56.95 for the shares. If you’d held to today, you’d be down $3.18 and have collected $19.79 in dividends. If you sold, you’d have realized a 29% total return, or a 5.2% compound annual growth rate (CAGR) return over five years. This scenario assumes that dividends are paid out rather than re-invested.
As you can see, dividends took BCE from what looked like a losing investment over five years to a marginally profitable one. However, the return was only 5.3% CAGR: an S&P 500 index fund would have performed better over the same holding period.
This leads us to an important question: is BCE stock a buy from today’s level?
Currently, BCE’s dividend is the highest it has ever been, while its stock price is relatively low. This would seem to argue that — assuming the company’s management can keep it basically humming along — the future five-year return should be better than the trailing five-year return. In this article, I will explore four factors that an investor would need to look at in order to determine whether BCE is a buy today: growth, profitability, valuation, and dividend safety.
Growth
Like most telcos, BCE has not done a lot of growing lately. Its most recent quarter showed a 0.9% increase in revenue and an 8.3% decrease in net earnings. That’s pretty tepid growth, although the growth in free cash flow (17%) would be enough to get the stock’s payout ratio below 100% pretty quickly. If that were to happen, then a year later, BCE would be able to increase the size of its dividend hikes.
Profitability
Next up, we can look at profitability. In the most recent quarter, BCE did $707 million in profit on $6 billion in revenue. That yields an 11.8% profit margin. That’s a healthy margin: BCE could see some costs increase or revenue decline slightly and still be profitable. Over the entire trailing 12-month period, BCE had a 9% net margin, an 8.3% free cash flow margin, and a 12.35% return on equity. These figures are all basically satisfactory; the return on equity is maybe even above average.
Valuation
When it comes to valuation, BCE leaves something to be desired. It trades at 17 times earnings, two times sales and 2.85 times book value. You can find telcos with similar quality scores at much cheaper valuations than this.
Dividend safety
Finally, we get to the matter of dividend safety. BCE has a 120% payout ratio based on earnings, and a 160% payout ratio based on free cash flow. These figures seem alarming, although BCE earned enough in 2020 to cover today’s dividend. It’s possible that after some capital expenditures take place or interest rates fall, it will be able to cover the dividend it pays today. For now, though, the dividend safety is lacking.
Taking everything into account, I consider BCE a moderate buy today. The company is profitable, and its earnings are growing, but it’s clearly suffering due to today’s high interest rates, and it pays more dividends than it can afford. It’s a very mixed picture — perhaps holding it at a small weighting in your portfolio is ideal.
