BCE Inc (TSX:BCE) stock has been struggling for several years now. The stock price is down slightly over an entire five-year period, and although the return with dividends included is positive, BCE has underperformed the market.
That might sound like an open and shut case for not buying BCE, but think again. When dividend stocks decline in price, their yields rise, holding everything else constant. If a company’s stock falls while its profit rises, then the stock becomes a better buy. These concepts may appear simple, but many investors fail to follow them, genuinely believing that the most investable stock is the one at all-time highs.
So, BCE Inc’s downward sloping stock chart is no reason to not buy it. The company has a staggering 7.2% dividend yield, after all – that fact alone merits further research. In this article, I’ll explore the question of where BCE stock will be in three years, ultimately concluding that it will probably be in better shape than it is now.
Interest rates will likely come down
One major reason why BCE will likely perform better in the future is because interest rates are expected to decline next year. Like most telcos, BCE has a lot of debt, and the interest on that debt increased this year, due to the Bank of Canada’s interest rate hikes. In its most recent quarter, BCE’s interest expense increased 25% year over year. Even though interest expenses increased slightly in the quarter (by about 1%), the company’s earnings nevertheless declined, because the interest on the company’s variable rate debt went up.
Now you might be thinking, “Sure, but the Bank of Canada hasn’t cut rates… why do you think that BCE will have cheaper debt then?” The answer is, we need to look at where interest rates are going in the future. We can’t forecast them with certainty, but we have clues. First, Federal Reserve Chair Jerome Powell said at his most recent meeting that he expected 75 basis points (0.75%) worth of cuts next year. Second, inflation is coming down in both Canada and the United States. Third and finally, the Fed and the Bank of Canada both have 2% as their inflation targets, and we are close to that level already. For this reason, it looks likely that interest rates will come down this year.
BCE has untapped revenue streams
Another reason to think that BCE will perform fairly well in the future is the fact that the company has many assets that it could be using to make money, but isn’t using to any great extent. For example, the company owns the streaming service Crave and has the rights to broadcast live sporting events. These are potentially lucrative business activities – just look at how far Netflix has gotten with its streaming service – and they should pay off in the long run.
Foolish takeaway
Having looked at a few key factors affecting the company, BCE tentatively looks like it will be doing better in three years than it’s doing now. The factors negatively impacting its performance are beginning to reverse. So, we’d expect the future to be better than the recent past.
