It’s no secret that some of the best companies to buy and hold for the long haul are businesses that offer essential services, consistently generate billions in cash flow, and have dominant positions in their industries. Therefore, many are wondering if BCE (TSX:BCE) is a good stock to buy now, given its ultra-cheap share price and attractive dividend yield.
Traditionally, the telecom sector has been an excellent place to find core portfolio stocks for several reasons. Firstly, as technology continues to improve and the internet is increasingly used for everyday tasks, communication has become an essential industry in our economy.
In addition, there are large barriers to entry, and much of the revenue these companies generate is recurring. Furthermore, most of the assets telecom stocks own are long-life assets, meaning once they’re up and running, they can help generate BCE cash flow for years with minimal maintenance – think telephone poles, cable infrastructure.
However, in recent years, with companies racing to build out their 5G networks and fibre infrastructure in order to keep or gain market share, they’ve been spending a ton of money.
BCE is no different; for years, its free cash flow was negative as it continued to fund its dividend, invest billions in upgrading its infrastructure, and even continued making acquisitions to expand its operations.
And while many of the investments and acquisitions were crucial in order to position BCE for the long haul, they significantly impacted BCE in the short term.
So, it was no surprise in early May when BCE elected to trim its dividend by just over 50%. And while that was unfortunate for existing shareholders, it has created a significant opportunity for investors with cash on the sidelines.
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Is BCE a stock worth owning?
Although a company cutting its dividend is never a good sign, the worst appears to be behind BCE. Not only does it need to return less cash to investors each year, but also many of its years-long capital projects to build out its 5G and fibre infrastructure are now mostly in the rearview.
Thus, the company can now begin to focus on improving its margins and, therefore, its payout ratio to ensure the dividend remains not only sustainable going forward, but can start growing annually again.
Furthermore, BCE continues to have an incredibly resilient and recession-proof business. Not only is the majority of its revenue recurring, but because the services it offers are essential, not to mention its operations are diversified all across Canada, it’s one of the most reliable stocks you can own.
Does the valuation make BCE one of the best dividend stocks to buy now?
Although BCE is not as cheap as it was earlier this year when it initially trimmed the dividend, the stock is still trading at a reasonable valuation, especially when compared to its historical averages, making it one many investors are looking to buy.
With BCE stock down 25% over the last year, it’s currently trading at a forward enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of just 6.7 times.
That’s significantly lower than BCE’s 5- and 10-year average forward EV/EBITDA ratios of 8.2 times and 8.3 times, respectively.
Furthermore, should interest rates continue declining, BCE stock could see another significant rally as yields fall and the cost of servicing its debt is reduced.
Therefore, while BCE trades considerably undervalued and offers investors a sustainable dividend yield of 5%, there’s no question that it’s one of the best dividend stocks to buy now.
