BCE (TSX: BCE) has struggled in the past three years. Contrarian investors are wondering if BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend stocks.
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BCE share price
BCE trades near $32 per share at the time of writing. The stock was as low as $29 earlier this year and is way off the $74 it fetched in the spring of 2022.
The initial decline in the second half of 2022 and through most of 2023 can be blamed on soaring interest rates. Canada’s central bank aggressively raised rates to cool off the hot post-pandemic economy as a way to get inflation under control. BCE carries a lot of debt on its balance sheet. In fact, total debt at the end of June was about $38 billion. High debt levels are common in the communications sector since companies use debt to fund expansion and upgrading of wireless and wireline network infrastructure. These investments cost billions of dollars, but they also deliver solid long-term revenue once completed.
The jump in borrowing costs due to higher interest rates put pressure on earnings. This cut into cash flow that could be used to reduce debt and pay dividends.
By the end of 2023, the Bank of Canada indicated to the market that it was done raising rates. In the second half of 2024, the central bank started to cut rates as it switched its focus from fighting inflation to navigating a soft landing for the economy. Rate-sensitive stocks broadly rallied over the past 18 months, but BCE and its peers have remained under pressure. Price wars hurt margins last year, and a drop in immigration has added to the pain as fewer new customers are purchasing devices and signing up for mobile and internet plans.
BCE’s decision last year to sell its stake in Maple Leaf Sports and Entertainment for $4.7 billion provided hope for investors that the company would use the funds to reduce debt and protect the generous dividend. That’s not what happened. Instead, BCE decided to acquire Ziply Fiber in the United States for about $5 billion in cash and the assumption of about $2 billion in debt. The news sent the stock’s decline into overdrive last fall. The funds received from the sale of the MLSE stake were used to fund the purchase.
In May, BCE cut its dividend by more than half. The market had widely anticipated the move, with the stock reaching a 15-year low leading up to the announcement.
Upside
With the dividend cut in the rearview mirror and the Ziply deal wrapped up, investors are trying to decide if the stock is oversold. BCE’s current dividend yield is 5.5% and the payout should be safe.
BCE continues to monetize non-core assets. It has agreed to sell its home security and monitored alarm assets. The deal is expected to close before the end of this year. BCE is also making a big push into artificial intelligence (AI) as it builds out a sovereign AI ecosystem that will enable Canadian companies to compete in the global AI economy. Bell AI Fabric will be a supercluster of AI data centres spread across six facilities. In addition, BCE is partnering with Canadian AI firm Cohere to provide full-stack sovereign AI solutions for government and enterprises in Canada. The pitch is that the assets will provide Canadian entities with the guarantee that their data remains in the country.
BCE is also focused on growing its digital media business and expanding its scripted and unscripted content offerings.
These initiatives, along with contributions from the planned expansion of Ziply, could start to turn things around for BCE in the next few years.
Time to buy?
It will take time for the new projects to deliver results, so investors will need to be patient. At this point, however, there should be limited downside as long as there isn’t a major revenue drop in the coming quarters.
If you have a contrarian investing style, BCE probably deserves to be on your radar at this level.
