There was a time when BCE Inc. (BCE-T) – then affectionately called Ma Bell – was seen as a classic “widows and orphans” stock. Safe, sound, and solid.
My late mother-in-law worked as a supervisor at the company in Trois-Rivières for years, building her retirement nest egg by buying a small number of shares each month. She didn’t die rich, but she was middle-class comfortable.
Fast forward to today. No one speaks affectionately of BCE anymore. Instead, the company is blasted for high prices, mass layoffs and gutting its media staff across Canada and globally.
The “widows and orphans” tag has also vanished. The share price has dropped 28 per cent in the past year – that’s almost unheard of for a major telecom in what has mainly been a rising market. The yield has risen to 8.6 per cent, based on a $3.99 annual dividend payment and Friday’s closing price of $46.21 (US$33.94 in New York). That may look attractive but in stock market terms it’s dangerous territory. Investors are concerned the company may freeze its dividend or, even worse, cut it.
That’s never happened, but there’s always a first time. In the first quarter of this fiscal year, BCE paid a dividend of 99.75 cents a share. Net earnings attributable to common shareholders were $402-million, down 44.6 per cent from the prior year. That works out to 44 cents per share, less than half the dividend payment. Adjusted earnings were $654-million or 72 cents per share, still well below the dividend.
But investors shouldn’t worry, according to RBC analyst Drew McReynolds and associate Ryan Conrad. In a research report released last week, they suggest the company’s free cash flow should be adequate to support the dividend. Free cash flow was $85-million in the quarter, below the consensus estimate of $273-million.
“We believe BCE is well-equipped to navigate a slower revenue environment leaning on a scale advantage, continued FTTH (Fibre to the Home) investment and internet market share gains, the realization of cost efficiencies, and an extensive array of tactical initiatives across wireless, wireline and media,” they wrote.
“We believe underlying FCF should support the current dividend underpinned by ongoing structural cost efficiencies and what should be a sustained step-down in capex intensity of about 15 per cent through the medium term upon completion of the generational FTTH build.”
So, lower costs going forward and some limited market share improvements. But apart from lower bond yields as interest rates decline (if they do), the RBC team doesn’t see any other catalysts that are likely to drive the stock higher.
“We look for further progress in de-levering the balance sheet [and] we continue to view BCE as a core holding that is well positioned to benefit from network convergence and long-term growth in 5G B2B,” the RBC duo concludes. They rate the stock as “sector perform” with a $54 target.
I think it’s going to be a while, perhaps a year or more, before we see BCE back at $54, but I also think a dividend cut is unlikely.
So, I suggest you sit back, enjoy the healthy cash flow, and fret about something else.
If you don’t have a position, I recommend the stock is a buy at the current price. The RBC analysis suggests there is not a lot of downside left. Buying now enables you to take advantage of a fat dividend while waiting for a potential capital gain.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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