BCE Inc. (TSX: BCE) has been one of Canada’s worst-performing telecom stocks over the last five years. Down 42.7% in price over the last five years, it has delivered a negative return even after factoring in the $18.14 worth of per-share dividends the stock has paid out in that period.
The question is, are things likely to be any different going forward?
The entire telecommunications industry has been in a rough place in recent years, with little pricing power and an irritable consumer base. Despite the fact that Canadian telcos are well protected from outside competition, they still haven’t been able to pull off much in terms of earnings growth.
Nevertheless, there are ways that could change in the future. While it doesn’t look like Canadians have much appetite for telco plan price hikes, telcos could increase their earnings by making their operations more efficient. Additionally, there has been some consolidation going on in the telco space lately, which could have the effect of boosting Canadian telcos’ margins. In this article, I explore whether BCE stock has better prospects today than it had five years ago.
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What BCE does
BCE, as you probably know, operates Bell Canada, a cellular and internet network that operates nationwide. In addition, it operates some TV stations and other media properties. Neither telcos nor media have been thriving lately, so that partially explains why BCE hasn’t been doing all that well.
As for whether it could turn things around in the future, the best indicator that something like that could happen is the consolidation that’s been taking place in telcos in recent years. Recently, Rogers Communications bought out Shaw, which reduced the number of competitors in the Canadian telco space. That move might reduce the overall competitive pressure in the Canadian telco industry, although its main beneficiary was Rogers, not BCE.
Recent earnings
Now on to something more positive for BCE: its recent earnings.
BCE’s most recent earnings release came in ahead of estimates, with $5.93 billion in revenue, 49.5% earnings growth, 29% operating cash flow growth, and 838% free cash flow growth. Some other metrics were not as good; for example, revenue declined 1.3%. Overall, though, the release seemed to indicate that BCE’s operations had become more efficient since the prior year quarter.
Valuation
Now, for what’s probably the most positive factor for BCE: valuation. Going by multiples, BCE stock is fairly cheap right now. At today’s price, it trades at the following:
- 10 times adjusted earnings
- 1.2 times sales
- 2.16 times book value
- Four times operating cash flow
- 9.28 times free cash flow
These multiples indicate that BCE is fairly cheap, and worth the investment if it can just stabilize its earnings where they are now — no growth required.
Foolish bottom line
Is BCE stock worth the investment today? After cutting its dividend, leaving more money than was previously available to invest back into the business, the company appears to be getting its financial house in order. I don’t see much growth here, but the stock is cheap enough not to require positive earnings growth. I think that it merits a small place in a well-diversified portfolio.
