BCE (TSX:BCE) is a stock that most investors are familiar with as one of Canada’s largest telecoms. But in recent years BCE’s growth has come to a halt as the company faces multiple headwinds. Does this mean that the stock is still worth buying for growth potential?
Let’s try to answer that question, and not just from the perspective of buying for growth potential.
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BCE’s issues: A quick reminder
BCE’s issues can be traced back not only to the inflationary pressures we’ve seen in recent years but also to a deeper issue that the telecom is beginning to address.
Telecoms like BCE are incredibly capital-intensive. They take on huge amounts of debt to finance growth and expansion efforts. And as borrowing became more expensive thanks to rising interest rates, that made its way onto BCE’s balance sheet.
This led BCE to begin a series of harsh, but ultimately necessary cuts. Those cuts included some of the deepest staffing cuts at the telecom in decades. BCE also shuttered parts of its media holdings across the country, including 45 of its regional radio outlets.
Finally, BCE announced it was selling off its stake in MLSE late last year for a whopping $3.7 billion. But rather than paying down its debt, BCE announced it was acquiring U.S.-based Ziply Fiber last year.
BCE’s transformation
BCE’s core subscription business isn’t disappearing, and neither is its media portfolio. That being said, BCE is evolving, which strengthens the case for buying for growth potential.
The Ziply acquisition exposes BCE to a new, and arguably underserved market. Ziply’s 1.3 million customers in the U.S., coupled with its 9 million connections in Canada, place BCE as the third-largest fibre provider in North America.
The move also goes a long way towards BCE meeting its stated goal of 12 million fibre connections within the next three years.
Outside of its core growth transformation, BCE’s cost-cutting efforts are beginning to yield results.
In addition to shuttering 45 of its regional radio stations, BCE has managed to slice capital expenditures by 17%. The telecom has also trimmed operating costs by 4.8%.
In fact, in the most recent quarter, BCE reported net earnings of $505 million, reflecting a 16% increase over the prior period. Additionally, BCE saw digital revenues grow by 19% over the prior period, now accounting for 42% of media revenue.
In short, BCE’s efforts are beginning to bear fruit.
Let’s not forget that juicy dividend
One of the main reasons why investors turn to BCE is for its dividend, and there’s a good reason for that. BCE has been paying out dividends without fail for well over a century.
And until recently, BCE has provided an annual uptick to that dividend. That practice was understandably halted last year as BCE turned its focus to cost-cutting efforts.
During this tumultuous period, BCE’s yield went from an already appetizing 6% to the utterly insane (and frankly unsustainable) 11.8% that it currently offers. In case you’re wondering, that’s one of the highest yields on the market.
That insane surge can be attributed to the equally insane 32% dip in the stock price over the trailing 12-month period.
This leaves investors not only wondering if BCE is worth buying for growth potential but also how long that dividend will last.
Most investors anticipate a dip in that yield will come, either through a cut or from the stock recovering. As of the time of writing, the stock has rallied nearly 5% over the past month.
Is BCE still worth buying for growth potential?
No stock, even the most defensive, is without some risk. This is evident with BCE, which is known for its massive defensive moat.
BCE’s troubles have put the stock price well into discount territory while swelling the dividend to unsustainable levels.
For investors with an appetite for risk, this represents an enticing opportunity to purchase a great long-term stock option that is already showing signs of growth (as part of a well-diversified portfolio).
And perhaps best of all, until that growth fully comes to fruition, prospective investors can scoop up that dividend and reinvest it for further growth.
