Bargain hunters started buying BCE (TSX:BCE) shares over the past month, but the stock is still down more than 25% over the past year. Retirees and other high-yield investors are wondering if BCE is still undervalued and good to buy right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
BCE stock
BCE trades near $47 per share at the time of writing. This is up from the 12-month low of around $44. At the high point in 2022, the stock reached $74, so there is decent upside potential.
The extended pullback over the past two years is largely due to rising interest rates. Telecom companies spend billions of dollars every year on network upgrades to ensure they can deliver state-of-the-art wireless and wireline services to their customers as data consumption soars. BCE continues to run fibre optic lines to the buildings of its customers and is expanding the 5G network. The company uses debt to fund part of the capital program. As such, rising borrowing costs can put a dent in profits and impact the amount of cash that is available for distribution to shareholders.
The Bank of Canada raised interest rates aggressively through 2022 and 2023 in an effort to cool off the economy and bring the labour market back into balance to reduce upward pressure on prices. Inflation in Canada hit 8% in June 2022. As of the March 2024 report, inflation was down to 2.9%, but this is still above the 2% target.
Sticky inflation could force the central bank to hold interest rates higher for longer. In that situation, BCE’s share price could remain under pressure. Economists, however, widely expect the Bank of Canada to start cutting interest rates in the second half of 2024. Once the rate cuts begin, BCE’s share price could catch a nice tailwind.
Operational challenges have contributed to the decline in the stock, along with the impact of higher rates. BCE has a large media division that is seeing a reduction in ad revenues in the radio and television segments. Clients have reduced spending to preserve cash flow or are shifting marketing budgets to digital alternatives. BCE announced staff cuts of about 6,000 positions in the past year and sold or closed dozens of radio stations to adjust to the market conditions. The company also trimmed programming across the television assets. The full benefits of the reduced expenses should start to show up in 2025.
Price wars over the past six months have also had an impact.
Outlook
BCE still expects revenue to be flat or slightly higher in 2024 than it was last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should come in a bit better than in 2023. Challenges persist, but the pullback in the share price is likely overdone, given the stable financial outlook.
Dividends
BCE raised the dividend by 3.1% for 2024. That’s a smaller increase than the 5% annual average hike over the previous 15 years, but it is in the range of what investors are seeing from other top dividend sectors like pipelines and utilities.
BCE’s yield is currently 8.5%. At this level, there could be an argument made that the market is anticipating a dividend cut. The payout ratio is very high right now, largely due to the big expenses tied to the layoffs. BCE is reducing its capital program to preserve some cash flow while it waits for clarity from regulators on some industry issues, including the requirement to allow competitors to use the assets BCE builds to connect its customers to its networks.
The lower capital spend and the reduced staff expenses should help support the distribution. No dividend is 100% safe, even BCE’s, but as long as there isn’t a surprise revenue hit in the next few years, the dividend should be OK.
Should BCE be on your buy list?
Ongoing volatility should be expected until the Bank of Canada starts cutting interest rates. Persistent inflation around the 3% level could lead to another dip in the stock toward the 12-month low.
That being said, contrarian investors seeking high dividend yields might want to start nibbling at the current level. You get paid well to wait for the rebound, and a move higher could be quick and substantial once rate cuts begin.
If you have some cash to put to work, BCE deserves to be on your radar.
