BCE (TSX:BCE) is down 23% in the past 12 months. Contrarian investors seeking top dividend stocks with high yields are wondering if BCE stock is now undervalued and good to buy for a Tax-Free Savings Account (TFSA) portfolio or Registered Retirement Savings Plan (RRSP) focused on passive income or total returns.
BCE stock
BCE trades near $46.50 at the time of writing. The stock is close to the 12-month low of around $44 and is way off the $74 it reached in the spring of 2022.
The decline over the past two years has been difficult to watch for long-term holders of BCE stock. Many retirees and other income investors own BCE as a core holding in their dividend portfolios. The stock has historically been a solid investment, so the big pullback is a bit of a shock. BCE is the largest communications company in Canada and the business enjoys a good competitive moat while providing essential mobile and internet services to commercial and residential customers across the country.
Much of the pain over the past 24 months can be attributed to the steep rise in interest rates. BCE spends billions of dollars every year on network upgrades. The company uses debt to finance part of the capital program, so higher borrowing costs will put a dent in earnings and can reduce cash that is available for distribution to shareholders. The Bank of Canada raised interest rates to get inflation under control by cooling off the economy. Inflation was around 8% in June 2022. The April 2024 inflation report came in at 2.7% in Canada, so progress is being made. In fact, economists widely expect the Bank of Canada to start reducing interest rates in the next few months to avoid pushing the economy into a recession.
As soon as the rate cuts begin, BCE could see renewed interest in the stock.
Risks
Interest rates have likely had the largest impact on BCE’s share price, but they aren’t the only issue. BCE’s media division is navigating a decline in ad spending across the television and radio segments. Customers are either trimming marketing budgets to preserve cash or shifting the spending to digital alternatives. These challenges won’t disappear in the near term. BCE announced staff cuts of about 6,000 positions over the past 12 months to adjust to the market conditions while positioning the business to meet its financial targets.
In addition, regulatory uncertainty is always a concern for Canada’s telecom operators. People complain that prices are too high for mobile and internet services. A federal election is due before the end of October in 2025, so there could be some renewed focus on communications costs over the next 12-18 months.
Forcing the owners of the fibre optic lines to provide access to competitors is one idea that comes up for discussion. This reduces the incentive for BCE to invest in the infrastructure the country needs to ensure firms and households have world-class wireline connections. Canada is a large country with a relatively small and spread-out population. The investments required to build and maintain the national communications networks are extensive, so it would make sense that rate plans might be higher than in countries where the population is concentrated in a much smaller area.
Finally, price wars over the past year have actually been quite intense, especially on the mobile side of the business. This could lead to lower long-term revenue if price reductions stick.
It might also, however, help ease the pressure from regulators.
Dividends
BCE raised the dividend by about 3% for 2024. This is less than the 5% average hike the company has given investors over the previous 15 years. Higher borrowing costs are partly to blame. Once interest rates start to decline, debt expenses should decline. Reduced staff expenses should also help the bottom line in the next couple of years.
At the time of writing, the dividend provides a yield of 8.5%. The payout should be safe. BCE expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be in line with 2023 or slightly higher.
Should you buy now?
Ongoing volatility should be expected over the next couple of years and a retest of the 12-month low is certainly possible. That being said, BCE pays an attractive dividend and the stock already looks cheap based on the financial guidance.
If you have some cash to put to work in a portfolio focused on high-yield dividends, this stock pays you well to wait for a recovery and deserves to be on your radar right now.
