BCE (TSX:BCE) is down 24% in the past year. The steep pullback has contrarian investors wondering if BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on high-yield dividend stocks.
BCE stock price
BCE trades for close to $46.50 at the time of writing. The stock hit a 10-year low of around $44 in April and is way off the $74 the share price reached at the peak in 2022.
BCE spends billions of dollars every year on network upgrades to ensure its customers have the wireless and wireline broadband capacity they need for work and entertainment. Funding for the projects partly comes from issuing debt or using credit lines. The jump in interest rates over the past two years has increased borrowing costs. This means more cash goes towards paying interest on loans, reducing profits and cutting into cash that could otherwise go to investors as dividends or directed to share buybacks. The steep rise in interest rates is the main reason investors dumped BCE stock over the past 24 months.
The Bank of Canada is expected to start cutting interest rates as early as this month. If that happens, and rate cuts continue through 2024 and into 2025, BCE should get some relief and could start to attract investors again who will see rates they are getting on safer Guaranteed Investment Certificates start to decline.
BCE has some operational challenges as well, but the management team is adjusting costs to address the concerns. BCE announced job cuts in the range of 6,000 positions over the past year. Falling revenue in the media group is one driver of the reduction. BCE closed or sold several radio stations and scaled back programming across the television segment. Digital revenues in the media group are on the rise and the worst could be over for the division as year-over-year first-quarter revenue was higher for the first time since 2022.
Upside
Financial guidance for 2024 shows revenue coming in relatively flat or a bit higher compared to last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should rise by up to 4.5% this year. BCE increased the dividend by 3.1% for 2024. This suggests the board is comfortable with the revenue and earnings outlook despite the headwinds from high interest rates and challenges in the media business.
Dividend safety
At the current share price BCE’s dividend provides a yield of 8.5%. When yields get this high the market is often signalling the anticipation of a cut to the distribution. No dividend is 100% safe. However, it is unlikely BCE will trim the the payout. The company has a strong balance sheet and the headcount reductions will meaningfully lower operating costs for next year. The anticipated decline in borrowing costs should also help in 2025 and beyond.
BCE gets most of its revenue from mobile and internet service subscriptions that businesses and households require regardless of the state of the economy, so it should hold up well if there is a recession.
The bottom line on BCE stock
Additional downside is possible in the near term. The broader market is due for a pullback after a strong start to the year, and any indications that the Bank of Canada will have to keep interest rates high for longer than anticipated could also send BCE to a new 2024 low.
That being said, most of the bad news should be priced into the stock at this level. Further weakness should be a good opportunity for buy-and-hold investors to add to a position.
The steady financial guidance suggests the stock is probably oversold and gives investors confidence in the sustainability of the dividend. At a dividend yield of 8.5% BCE doesn’t even have to rise much to deliver an attractive long-term return. If you have some cash to put to work in a portfolio focused on high-yield dividend stocks, BCE deserves to be on your radar right now.
