BCE Inc (TSX: BCE) was one of the worst-performing TSX large caps over the last five years. In that period, BCE declined 40% in price, while the TSX gained 84%. Also in that period, BCE delivered a negative-16.4% total return, while a typical TSX index fund delivered a 107.64% total return. It was a period of considerable underperformance for BCE.
The drivers of BCE’s underperformance are pretty straightforward. The company’s revenue is barely growing; its adjusted earnings are down over the trailing 3, 5 and 10 year periods; and its dividend payout ratio is usually very high. All of these factors contributed to a period of massive underperformance for BCE.
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Can BCE turn it around?
The question is, can the company turn things around?
After slashing its dividend in half, BCE has more flexibility to retire debts or invest in its operations than it had in the past. The company also has achieved a pretty respectable free cash flow (FCF) growth track record in recent years, with FCF compounding at a remarkable 56.7% per year over the last three. That fact looks very good on the surface but, as we’ll see shortly, it comes with a major “but” attached to it.
At today’s price, BCE stock trades at 11.6 times adjusted earnings, 5 times reported earnings, 1.7 times book value and 3 times operating cash flow. It certainly looks like there’s an opportunity here from a value perspective. But if the company’s revenue and adjusted earnings keep declining, then the “value” we see today could easily prove to be a mirage.
Let’s take a look at the company’s most recent earnings release to see what’s happening.
Recent earnings
BCE Inc’s most recent earnings release was mixed, with a miss on revenue but double beats on reported and adjusted EPS. Headline metrics included:
- Revenue: $6.1 billion, up 1.3%.
- Reported earnings: $4.5 billion, up from a loss.
- Adjusted earnings: $733 million, up 6.5%.
- Cash from operations: $1.9 billion, up 3.9%.
- Free cash flow: $1 billion, up 20.6%.
- Capital expenditures (CAPEX): $891 million, down 6.6%.
Broadly, these numbers are better than those seen in most of BCE’s quarters over the last three years. The quarterly revenue growth rate, while slow, is up compared to the three year average; earnings are growing rather than shrinking; FCF is rising while CAPEX falls. These look like decent trends for a company trading at just 11.6 times earnings.
One thing that’s worth scrutinizing is BCE’s apparently high FCF growth. As I mentioned earlier, the company’s FCF compounded at 56.7% over the last three years and grew 20.6% in the most recent quarter. These are impressive growth rates.
However, it’s important to remember that BCE is winding down a major investment period. From 2020 to 2023, BCE was spending heavily on building out its 5G infrastructure. The peak of that spending came in 2023 and it has been trending down since then. CAPEX is a cost that gets subtracted from FCF, and infrastructure spending is a form of CAPEX. So, BCE’s high FCF growth is mostly due to a certain cost coming down rather than top line strength. Once the 6G era begins, BCE’s FCF will start falling again.
The bottom line
Taking everything into account, BCE stock looks like a reasonable hold today. After slashing its dividend and falling nearly 50% in the markets, it has reached a valuation that makes sense given its limited growth opportunities. However, I don’t expect anything truly massive here – just a satisfactory, utility-like performance.
