BCE (TSX: BCE) is one of Canada’s top dividend stocks with a long track record of distribution growth. Investors seeking high-yield TSX dividend stocks for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) are wondering if BCE stock is undervalued right now and good to buy.
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BCE stock
BCE is a contrarian pick today. The share price fell to a low not seen in a decade this summer, slipping below $43 compared to the 2022 high around $74. At the time of writing the stock trades near $46, so it hasn’t recovered much from the slump.
BCE uses a lot of debt to fund its capital programs. When interest rates soared in 2022 an 2023, the jump in borrowing costs scared investors who worried that the extra debt expenses would reduce cash which can be used to pay dividends. There has certainly been an impact. BCE raised the dividend by about 3% for 2024 compared to the average annual increase of roughly 5% in the previous 15 years.
At the same time, slumping advertising revenue has put pressure on the media business, and price wars have been headwinds for mobile and internet subscriptions. Add in concerns about regulatory uncertainty and it is easy to see why some investors hit the sell button.
Opportunity
The worst might be over, however, and BCE’s generous dividend should be safe.
The Bank of Canada reduced interest rates by 1.25% over the past few months with more rate cuts anticipated through the end of next year. This will help lower debt expenses. BCE has also agreed to sell its stake in Maple Leaf Sports and Entertainment (MLSE) to Rogers (TSX: RCI.B) for $4.7 billion. The deal is expected to close next year and will provide a nice cash infusion to reduce debt.
Bell could also sell a minority interest in some of its network infrastructure to private equity firms as a way to unlock some value and further reduce debt to shore up the balance sheet. Rogers just announced a $7 billion deal of this nature that could set off bidding wars for similar assets at BCE and other communications players.
Finally, BCE trimmed staff count by more than 10% over the past year to position the business to succeed in the current environment. The full benefits of the reduced operating costs should start to show up next year.
BCE still expects full-year 2024 revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) to be in line with 2023 or slightly higher. Based on this guidance and anticipated benefits of lower interest rates and assets sales, BCE stock is probably oversold. Investors who buy BCE at the current level can get a dividend yield of 8.7%.
The bottom line on BCE stock
Near-term headwinds should be expected and a broad-based pullback in the TSX after its big run this year could drag BCE down to retest the 12-month low in the coming months. That being said, fears about the safety of the dividend are probably overblown now that interest rates are falling and management is focused on monetizing assets to shore up the balance sheet.
Investors who already own BCE should probably hold the position. New investors might want to start nibbling here and look to add if there is additional weakness. At the very least, you get paid well to ride out the turbulence.
