BCE (TSX:BCE) has been on a downward trend for most of the past 12 months. Contrarian investors are wondering if BCE stock is undervalued today and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Impact of interest rate hikes on BCE
BCE trades for close to $54 per share at the time of writing. The stock is off the October low of around $49.50 but has a long way to go to reach the $65 it fetched in May last year or the 2022 high of around $74.
Aggressive interest rate hikes by the Bank of Canada caused most of the pain for investors. BCE uses debt to fund part of its capital program, including the expansion of the 5G network. Higher interest rates drive up borrowing costs.
The central bank is trying to get inflation back down to the 2% target. Inflation in Canada was 8.1% in June 2022 and has since trended lower. The November 2023 inflation number came in at 3.1%, which was unchanged from October.
Rate hikes are designed to slow down the economy and bring the jobs market back into balance. Higher debt expenses force households to spend less on discretionary items. As demand declines for products and services, companies need to add fewer employees. The result should be a slowdown in price hikes and slower wage growth.
Employment numbers are holding up well in the United States and Canada, according to the latest reports. Investors will want to keep an eye on the December 2023 inflation number to get a sense of whether the Bank of Canada will be able to start cutting interest rates in 2024, as is currently anticipated by markets.
BCE expects to report a dip in earnings per share for 2023 compared to 2022, largely due to the jump in debt costs. On the positive side, the increase in interest rates has driven up the return BCE can earn on the funds sitting in its defined benefit employee pension funds. This means there shouldn’t be a need to top up the pension accounts.
Weaker advertising revenue in BCE’s media business might also have contributed to the stock price slide. BCE cut more than 1,000 jobs this year and closed some radio stations, as it adjusted to the challenging market conditions. Radio and TV advertisers are reducing marketing expenses to protect cash flow or are shifting spending to digital alternatives.
Despite the headwinds, BCE maintained its guidance last year. Investors should see BCE report overall 2023 revenue and free cash flow that exceeded 2022 levels, supported by strong performances in the core mobile and internet divisions. That should provide support for the dividend in 2024.
BCE increased the dividend by at least 5% in each of the past 15 years. At the current share price, the dividend provides a 7.1% yield.
Is BCE stock a buy today?
Ongoing volatility should be expected. The market is currently anticipating rate cuts by the Bank of Canada in the back half of 2024. If that turns out to be the way things go, BCE’s share price should move higher.
However, it is possible that inflation will remain sticky and that interest rates won’t start to decline until 2025. If the Bank of Canada sends out a message that it will need to keep rates higher for longer, BCE could retest the $50 point in the coming months.
That being said, income investors should feel comfortable buying the stock at the current level to get the attractive yield and then look to add to the position on any additional downside. If you have some cash to put to work, BCE deserves to be on your radar for a buy-and-hold portfolio.