BCE (TSX:BCE) is down about 16% over the past 12 months. Investors seeking high-yield passive income inside their self-directed Tax-Free Savings Account (TFSA) are wondering if BCE stock is now undervalued and good to buy for the generous dividend.
BCE stock price
BCE trades near $50.50 at the time of writing. It was around $60 at this time last year and ran as high as $65 in 2022 before rising interest rates started to take a toll on investor sentiment.
The Bank of Canada raised interest rates aggressively over the past two years in an effort to get inflation down from 8% in June 2022 to the 2% target. Progress is being made as inflation for January 2024 came in at 2.9%. Markets have started to expect rate cuts at some point in 2024. When that occurs, BCE stock could get a boost.
The Canadian communications giant spends billions of dollars every year on capital projects that include the expansion of the 5G network and the extension of fibre optic lines to the premises of its customers. These initiatives should drive long-term revenue growth and support BCE’s competitive position in the market. High interest rates, however, make borrowing more expensive, and BCE uses debt as part of its funding program. As debt expenses rise, profits take a hit, and there can be less cash available for distributions.
Media woes
BCE cut 1,300 employees in 2023 and recently announced another reduction that will eliminate an additional 4,800 positions. The moves are largely driven by challenges in the company’s media group. BCE owns a television network, specialty channels, and radio stations. Customers are spending less on advertising in these traditional media platforms. Part of the reduction is due to businesses protecting cash flow to cover rising costs. Advertisers have also shifted spending to social media alternatives.
This trend could persist. BCE is selling more than 40 radio stations and is trimming programming across the television and radio assets.
Risks
The government wants to force BCE and other owners of fibre lines to allow competitors to use the connections and sell competing services. BCE is reducing its capital spending as a result. It is expensive to roll out state-of-the-art communication connections, and the company argues it is not in the interest of shareholders to build networks only to be forced to allow competitors to access the lines and poach customers.
This is an ongoing issue for the big telecom players and is worth watching.
Upside?
BCE’s core mobile and internet businesses bring in most of the company’s revenue. Strength in these segments helped BCE deliver overall revenue growth and free cash flow growth in 2023, despite the headwinds on the media side of the company. Management expects 2024 to deliver flat to slightly higher revenue. Free cash flow will slip a bit, in part due to charges connected to costs associated with the staff cuts.
Next year should deliver better results. Expenses will be lower after the headcount reductions, and a drop in borrowing rates would help as well.
BCE remains a very profitable company. Adjusted net earnings in 2023 came in at $2.93 billion, which was only off about 4.3% form the 2022 results. Given the relative earnings stability in the current challenging economic climate, the drop in the share price might be overdone.
Dividends
BCE raised the dividend by 3.1% for 2024, so management can’t be too concerned about the profit outlook. Investors who buy the stock at the current level can get a 7.9% dividend yield.
Should you buy BCE now?
Ongoing volatility should be expected until the Bank of Canada starts to reduce interest rates. Government decisions will also be in play as the country heads closer to the next election, likely in the fall of 2025.
If you already own the stock it is probably worthwhile to hold on at this point. New investors might want to start nibbling while the shares are out of favour and even look to add to the position if there is further weakness.
BCE is a contrarian pick today, but you get paid well to ride out the turbulence. The dividend should be safe for investors focused on generating high-yield passive income inside a TFSA.
