Investors with some cash in their Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) are wondering which TSX stock might still be undervalued right now and good to buy for a portfolio focused on dividends.
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BCE
BCE (TSX: BCE) is a contrarian pick today. The stock trades near $46 compared to $74 at the peak in 2022. BCE dipped as low as $43 in July before bargain hunters moved in, but the rebound has trailed other dividend stocks that are benefitting from cuts to interest rates.
High debt levels are largely to blame for the pain over the past two years. BCE borrows money to fund its capital program running in the billions of dollars every year. Projects include the building and upgrading of wireline and wireless communications networks across the country. The sharp jump in borrowing costs in the past two years drove up interest expenses on the debt. This has put pressure on profits and reduces cash that is available for dividends. BCE raised the distribution by about 3% in 2024 compared to an average of 5% annually over the previous 15 years.
Price wars, declining revenue in the media business, and regulatory uncertainty have also contributed to the pain. In short, it hasn’t been a great time to be a BCE shareholder.
Outlook
Looking ahead, investors shouldn’t expect to see the share price rocket higher in the near term. However, the dividend should be safe and 2025 could turn out to be better than the market currently expects. BCE recently announced a deal to sell its stake in Maple Leaf Sports and Entertainment (MLSE) for $4.7 billion. The sale is expected to close in 2025 and will help shore up the balance sheet. In addition, BCE has trimmed staff count by more than 10% over the past year. The result is a much leaner organization that is focused on hitting financial goals as BCE continues its digital transition. Lower operating expenses combined with falling interest charges due to rate cuts will help support the bottom line next year.
BCE is targeting flat or slightly higher revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024 compared to 2023. Based on this outlook, along with the expense improvements heading into next year, the stock is probably oversold.
Investors who buy BCE at the current level can get a dividend yield of 8.7%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $72 per share at the time of writing. The stock is up roughly 20% in the past year, but is still way off the $93 it reached in early 2022.
Soaring interest rates caught businesses and households off guard in the past two years. Those with too much debt have struggled to cover the increase in interest payments. This has led to an increase in provisions for credit losses (PCL) at Bank of Nova Scotia, as well as other banks. The recent cuts to interest rates in Canada and the United States will take time to make a meaningful impact, but PCL should start to decline in the coming quarters as long as rates continue to fall and the economy remains in decent shape.
Economists widely expect a soft landing for the economy in both Canada and the United States.
Unemployment actually decreased in the U.S. last month and Goldman Sachs (NYSE: GS) puts the risk of a U.S. recession at 15%. In Canada, however, the jobs picture is a bit more uncertain with unemployment rising to 6.7% in August, the highest in seven years. Investors will want to keep a close eye on the unemployment trend due to the number of households with mortgages coming due that will have to renew at higher rates. A spike in job losses could push PCL even higher even as rates decline.
That being said, Bank of Nova Scotia remains very profitable and has a solid capital cushion to ride out some turbulence. Investors who buy the stock at the current level can get a dividend yield of 5.9%.
The bottom line on cheap TSX dividend stocks
BCE and Bank of Nova Scotia pay attractive dividends that should be safe. If you have some cash to put to work in a buy-and-hold dividend portfolio, these stocks still look undervalued and deserve to be on your radar.
