BCE (TSX:BCE) has pulled back considerably in the second half of 2023. The drop has investors who missed the rally off the 2020 crash wondering if BCE stock is now undervalued again and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income or a Registered Retirement Savings Plan (RRSP) targeting total returns.
BCE stock
BCE trades for close to $54.50 at the time of writing. That’s actually up from the 2023 low near $50 it hit in early October but is still way down from the $65 the stock fetched in May.
A surge in interest rates is to blame for most of the decline, although BCE is also seeing some revenue weakness in the media division that might be adding to the pain.
On the rate front, the Bank of Canada has aggressively increased interest rates to cool off the economy and bring inflation back down to 2%. Inflation hit 8% in Canada in June 2022 but came in at 3.1% for October, so the trend is moving in the right direction. Rates will likely remain at the current level until there is clear evidence that the 2% target will be reached and that there won’t be a risk of a sudden spike, as interest rates start to decline.
Higher interest rates make borrowing more expensive for BCE. This can put a dent in profits as debt expenses increase. In fact, BCE expects earnings per share to dip a bit in 2023, partly due to the higher borrowing costs.
Regarding the media group, BCE’s television and radio segments are seeing a decline in ad spending as businesses reduce marketing budgets to preserve cash or shift spending to alternatives, such as digital media. The digital platforms in BCE’s media business are actually seeing revenues rise, but this is not covering the shortfall in the other assets. BCE cut staff this year and shut down some radio stations to adjust to the challenging market conditions.
The overall business, however, is performing well. BCE’s core mobile and internet services continue to see strong demand. This is helping to offset the weakness in the smaller media operations. Management expects total revenue and free cash flow to be higher in 2023.
BCE dividend
BCE raised the dividend by at least 5% in each of the past 15 years. The solid performance from the wireless and wireline operations should support the dividend in 2024. Investors who buy BCE stock at the current level can get a 7% dividend yield.
Is BCE good to buy today?
Long-term investors who already own the stock should probably hold on at this point. Investors with some cash to put to work might want to start adding BCE to their portfolios. Volatility should be expected until there is clarity on the direction of interest rates through next year, but BCE already looks discounted at the current price, and investors get paid well to wait for the recovery.
