Before talking about BCE (TSX:BCE) stock from five years ago, I thought it would be more telling to go back farther in history.
For an extended period of about 12 years from 2009 to 2021, the Bank of Canada kept the policy interest rate between 0.25% and 1.75%. More and more investors were attracted to BCE stock for income.
That’s because fixed-income investments provided little interest income, pushing Canadians to shift more of their assets to higher-risk, but potentially higher-return assets – stocks. BCE stock stood out as a seemingly good replacement for more immediate income.
A reliable dividend
At the beginning of the 12-year period, it was fine because BCE was increasing its earnings per share at a good pace while paying a fat and growing dividend. Additionally, the dividend stock was trading at a good valuation. However, as more and more investors jumped in (likely for income) even when growth slowed at the big Canadian telecom, BCE stock’s valuation started creeping up.
The highest level was – as you can probably guess – right before the Bank of Canada started increasing interest rates in 2022. BCE stock reached about $73 per share, representing a price-to-earnings ratio (P/E) of over 22.
It’s important to note that BCE stock’s yield stayed around 5% through 2019 because it kept increasing its dividend like clockwork.
Regardless, the stock came crashing down in the rate hike cycle. The last two rate cuts have hardly repaired the damage from the stock valuation compression.
Undervalued?
With this background story in mind, perhaps it won’t be too surprising to reveal that over the last five years, BCE stock only returned about 6% – annualized returns of about 1.2%. In other words, $1,000 invested in BCE stock five years ago would be worth about $1,063, as shown from the chart below.
BCE Total Return Level data by YCharts from an initial $1,000 investment
This is not a good long-term investment by any means. However, it’s also not the worst investment because it at least delivered positive returns.
This begs the question – is BCE stock a good investment today?
Valuation-wise, BCE stock trades at a P/E of about 15.4, at $48.20 per share at writing. This seems reasonable compared to its historical valuation range. Plus, the stock has a long-term normal valuation of about 15.6 times earnings, which could be used as the initial gauge for its fair multiple.
A high dividend yield
As the stock price has come down, its dividend yield has been pushed up to almost 8.3%. But is the yield sustainable? Will BCE stock cut its dividend?
Its payout ratio has actually been over 100%, since 2020. This means it has been paying out more dividends than it has earned in profits. However, the company also makes lots in cash flows, which could be what is sustaining its dividend policy. Reducing its capital investments will also immediately boost its free cash flow.
Still, it’s obvious that BCE has been operating in a challenging environment. After cutting its staff by about 9% across the company, it increased its dividend by 3.1% in February. This compares to the approximate 5% annual dividend hikes it was able to execute over the past decade.
BCE needs to reignite growth somehow. However, its big dividend – if it’s able to at least maintain it –should provide a good buffer for investors to increase their chance of getting positive returns over the long run. With an 8%-plus dividend yield, it might be too enticing for income-hungry investors. Just note that there’s little margin of safety from the stock valuation today.
