BCE (TSX:BCE) is down about 40% over the past two years and trades close to a 10-year low. Dividend investors with a contrarian strategy are wondering if BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
BCE stock
At the time of writing, BCE trades for close to $44.50 per share. It was at $74 at the high point in 2022.
The extent of the decline probably caught many long-term investors by surprise. BCE is the largest player in the Canadian communications sector and gets most of its revenue from essential mobile and internet services. This should make it an attractive pick during uncertain economic times. The dividend is generous, and BCE has a great track record of raising the payout.
What happened?
The steep increase in interest rates over the past two years by the Bank of Canada is a major contributor to the weakness in BCE’s stock. On one hand, income investors have been able to get rates above 5% on no-risk Guaranteed Investment Certificates (GICs). This might have led investors to sell BCE stock to the point where the market thinks the higher dividend yield offers an adequate premium for the added risk.
High interest rates and soaring bond yields make debt more expensive. BCE borrows money to fund part of its large capital program, so a jump in debt expenses puts a pinch on profits and can reduce cash available for dividends. Economists expect the Bank of Canada to begin cutting interest rates in the second half of this year. Lower rates should be positive for BCE’s share price.
On the operational side, BCE’s media division faces declining ad revenue in the traditional radio and television segments. Clients are trimming marketing budgets to preserve cash flow or have shifted spending to digital alternatives. The trend is likely to continue, and BCE cut thousands of jobs in the past year to adjust to the current conditions. A lower cost base in the business should help BCE meet its financial targets in 2024 and 2025. BCE expects 2024 revenue to be in line with 2023. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should be slightly better, according to the company’s 2024 outlook.
Government policy is another issue on the minds of investors. BCE spends billions of dollars running high-speed fibre optic lines to the premises of its customers. The government wants to force BCE to give competitors access to this infrastructure. BCE says this is unfair and management is already cutting back on planned infrastructure expansion. Until there is clarity on the issue, BCE’s share price could remain under pressure.
Dividends
BCE recently raised the dividend by 3.1% for 2024. This is less than the average of about 5% per year the board hiked the payout over the past decade. At the current share price, the dividend provides a yield of 8.95%. This is very high and might indicate market concern that the payout is not sustainable.
It is unlikely that BCE will cut the distribution unless there is a material negative shift in the business. As with any business, no dividend is 100% safe.
Is BCE stock a buy today?
Investors should expect ongoing volatility in the share price. Additional downside is certainly possible if interest rates stay at current levels through the end of the year or if government policy goes against BCE’s interests.
That being said, the stock is likely oversold at this point, and the dividend should be sustainable. If you are a contrarian investor and have some cash to put to work in a portfolio targeting passive income, BCE deserves to be on your radar at this level.
