BCE Inc (TSX: BCE) is one of Canada’s highest yielding large cap stocks. Its 8.9% dividend yield is more than triple the yield on the TSX Composite Index (about 2.8%). If you invest $100,000 in BCE today and everything goes well, you’ll get $8,900 in annual dividend income back. That’s an enticing proposition.
The question is whether everything will turn out well. BCE pays out more in dividends than it earns in profit, and its earnings declined 42% last quarter. Its earnings are down over the trailing 3-, 5-, and 10-year periods as well. Although BCE’s free cash flow is up over the last 5- and 10-year periods, its dividend growth has been much faster, hence the high payout ratio. In this article, I will explore why BCE’s stock is languishing and whether it can turn things around.
Competitive woes
One problem for BCE is competition. The company has been forced to share its infrastructure with competitors, in order to create more competition in the market. As a result, it has to best its competitors’ prices. Although Canadian telcos are “protected” in a sense – foreign telcos aren’t allowed into the market – it looks like they don’t enjoy that much pricing power.
TSX telcos’ services are more expensive than those of foreign equivalents, but their prices aren’t rising over time. Cellular bills – their bread and butter – really haven’t increased much in price over the last decade. My bill has pretty much been the same since 2015, and I haven’t cut any services. If anything, large data packages (say, 15 gigabytes or more) have gotten cheaper.
So, Bell’s services are not exactly lighting up the night sky. Most Canadians view Bell and its competitors as interchangeable. However, Bell’s competitor Rogers (TSX: RCI.B) at least has a modest payout ratio and high free cash flow growth over the last 5- and 10-year periods. It also has the nation’s largest 5g network, which may aid with signing up new subscribers. I’d pick RCI.B over BCE if I had to invest in a Canadian telco – although I’m not investing in any of them.
BCE stock’s results
Since we’ve been talking about BCE’s earnings woes, we should look at them in detail. In the most recent quarter, BCE delivered:
- $6 billion in revenue, down 0.7%.
- $457 million in net income, down 42%.
- $654 million in adjusted net income, down 15.3%.
- $2.5 billion in adjusted EBITDA, up 1.1%.
- $0.72 in adjusted earnings per share (EPS), down 15.3%.
- $1.1 billion in operating cash flow, down 9.2%.
- $85 million in free cash flow.
Overall, not a lot to like here. The previous high growth in free cash flow evaporated. In past articles, I said the high growth in that metric would be encouraging if it became a trend. Unfortunately, it now looks like it’s not a trend. I’m not sure how BCE is going to grow while interest rates are as high as they are. The telco is heavily indebted.
BCE stock: valuation
As we’ve seen, BCE’s earnings are declining. Is its valuation cheap enough to make up for it? BCE is certainly cheaper than the S&P 500, trading at:
- 14 times earnings.
- 1.7 times sales.
- 2.5 times book value.
- 5.3 times operating cash flow.
The operating cash flow multiple is quite low, but otherwise this isn’t especially cheap for a TSX stock. Rogers trades at just 11.9 times earnings while having a lower payout ratio and more free cash flow growth than BCE. Canadian banks in general are cheaper, while performing better than BCE. I’ll pass for now.
