BCE Inc (TSX:BCE) is one of Canada’s largest telecommunication (telco) companies. The parent company of Bell Canada, as well as media properties like CTV News, is one of the country’s oldest and most widely known.
Despite BCE’s massive presence and scale, its stock has been performing poorly in the markets in recent years. Down 25% over the last five years, it has massively underperformed the TSX Index. Also, the company recently cut its dividend, a classic symptom of a stock in decline.
With all that said, BCE does have some things going for it. It has many customers across the country. It owns some of Canada’s most popular media outlets. And its brand is well known.
It appears that the underlying assets here could be worth something if bought at a reasonable price. In this article, I will explore BCE’s business and stock price so you can decide whether it’s a good fit for your portfolio today.
Slow growth
One thing that BCE Inc has not been doing much of lately is growing. In the trailing 12-month period, the company’s revenue declined 1.2%, its earnings declined 78%, and its free cash flow ((FCF)) was down 2.8%. The last five years weren’t much better. Over that period, BCE’s revenue compounded at 0.5%, its earnings at -33%, and its free cash flow at 2.8%. For earnings to be down over such a prolonged period of time is a major red flag, as is the fact that there has been no improvement in recent quarters. It speaks to a prolonged trend of decline with little to no indication of a recovery.
Respectable margins
Turning from growth to profitability, we see a somewhat rosier picture. BCE does not score especially poorly on the profitability front. In the trailing 12-month period, it delivered the following margins and returns on equity/capital/assets:
- Gross margin: 45%.
- Net margin: 2.3%.
- FCF margin: 13%.
- Return on equity: 2.6%.
- Return on capital: 6.1%.
- Return on assets: 0.78%.
Some of these metrics are not terrible. The FCF margin is actually pretty good. However, most of the rest of the profitability metrics shown above are just ‘OK.’ So on the profitability front, BCE fares a little better than on growth, but not amazingly well.
Valuation
Next up, we can look at valuation. You might suspect that this would be the part of the analysis that looks better for BCE – shrinking companies sometimes trade at truly rock-bottom valuations. However, BCE’s valuation is not that cheap either. At today’s prices, it trades at:
- 9.3 times adjusted earnings.
- 71 times reported earnings.
- 1.2 times sales.
- Two times book.
- 3.7 times operating cash flow.
The only one of these multiples that is truly enticing is the cash flow multiple, and that’s operating cash flow, not FCF. The price/FCF multiple is 8.5, which is still low, but possibly not low enough for a shrinking business.
High dividends
Finally, we get to dividends. One positive that BCE undeniably has going for it is a high yield. At today’s price, the stock yields 5.8%, which is far above average for the TSX Index. However, the yield was much higher in the past. Last year, many people bought BCE stock expecting a 12% yield, only to see the dividend get cut in half. So while BCE has a high optical yield, its spotty dividend track record casts doubt on the dividend’s sustainability.
Foolish takeaway
Taking into account everything mentioned in this article, I cannot recommend BCE stock. The company is shrinking, the dividend is being cut, and the valuation is not even dirt-cheap. There are better value opportunities out there.
