Is BCE your Canadian Telecom Pick?

BCE - Bell CanadaBCE Inc. is Canada’s largest communications company, providing a comprehensive suite of broadband communications and content services to consumer, residential, business, not-for-profit and government customers in Canada.

In March 2017, after one year of regulatory reviews, BCE completed the acquisition of Manitoba Telecom Services Inc. and created a new subsidiary named Bell MTS. The purchase added 470,000 wireless customers with the promise to invest $1B over 5 years. In the process, Telus ended up benefiting by negotiating the purchase of 100,000 customers from Bell MTS since the competition bureau wanted another player in the region.

When it comes to the Canadian telecommunication sector, there are now four major players with Shaw TSE:SJR.BNYSE:SJR Communications  recently acquiring a wireless company. Telus TSE:TNYSE:TU and Rogers Communications TSE:RCI.BNYSE:RCI are the other two major competitors in the wireless business. It’s officially a crowded competitive sector but an oligopoly nonetheless.

BCE Business Summary

BCE TSE:BCENYSE:BCE operates under a number of services such as Bell, Bell Aliant, Bell MTS or Bell Media providing wireless, high-speed Internet, IPTV and Satellite TV, Home Phone local and long distance, as well as IP-broadband connectivity services and business service solutions.

At $56B in market capitalization, BCE is nearly as big as its next two biggest competitors (Telus, Rogers) combined. That should give you a perspective on their size.

By The Numbers

Why invest in BCE?

  • Strategically well positioned in all segments
  • Market leader in Internet, TV and data
  • Strong wireless momentum with attractive growth opportunities
  • Canada’s leading vertically – integrated media company
  • Investment grade balance sheet with significant available liquidity
  • Strong free cash flow generation to fund capital investments and return capital to shareholders
  • Target dividend payout ratio of 65% – 75% of free cash flow(2)*
  • One of the top dividend yield stocks in Canada with strong total shareholder returns

Source: Investor Fact Sheet

BCE Revenue

BCE had a strong 1st quarter for 2017 with revenue of $5,384 million for an increase of 2.2% over the same quarter a year ago. Free cash flow is up 17.0% with a strong growth in wireless subscribers. The wireless segment revenue grew by 7.1% compared with a drop of 0.1% in the wireline segment for the same quarter and the media business was also relatively flat with an increase of 1.3%.

BCE - Business Segments
Source: 2017 Q1 Fact Sheet

While there is an oligopoly in the telecommunication business, the wireless sector will always be one of the most profitable business as you can expect each individual to have its own smart phone with a data plan some day while a home shared by many only need one internet and TV connection. As such, it’s good to see the wireless and internet segment grow. It’s a sign of trust by the consumers but consider that 470K subscribers were purchased.

BCE - Subscribers
Source: 2017 Q1 Fact Sheet

BCE Dividend Summary

BCE is a Canadian Dividend Aristocrats with 8 consecutive years of dividend increases. BCE is not far from becoming a Dividend Achiever if it can maintain its dividend growth and join a few other Canadian telecoms with the Dividend Achiever badge of honor. BCE is conservative with its dividend growth and averages 5% CAGR dividend growth. See below for its 3, 5 and 10 year averages.

  • 3 year average of 5.42%
  • 5 year average of 5.95%
  • 10 year average of 7.54%

I like to look at the growth of dividends against the EPS has it shows if the earnings from the company are keeping up with the dividends. If it’s not, then it’s a warning sign to look further into that. BCE has grown its dividends along with its earnings but the gap has shrunk over time as the dividend payout ratio has increased. Can it continue to increase its dividend at the same rate? Will it grow slower? This is where a competitor might be a better option if dividend growth is important.

BCE - Dividend vs EPS
Source: Financial Reports

The numbers point to BCE stretching the payout ratio to maintain a certain dividend growth. The Manitoba Telecom acquisition did well to grow the subscribers but that’s pretty much it when it comes to buying small players in Canada. There aren’t many other options to grow outside of taking away subscribers from the competition which usually has an impact to the immediate bottom line.

  • 3 year average of 85.60%
  • 5 year average of 83.64%
  • 10 year average of 71.71%

Where will the revenue growth come from? The media segment? This is where I like the Telus Health segment as it doesn’t have much competition, unlike the media business Bell and Rogers are pursuing.

Investment Philosophy #1: BUSINESS QUALITY

As mentioned earlier BCE is the largest Canadian communications company by a large margin. The wireless subscriber base is 24% of the Canadian population (35.85 M) providing a regular stream of income to BCE and the investors. The competition is stiff but the business is profitable.

If you had invested $1,000 ten years ago, it would be worth $2,662 and you would have had a 10.46% CAGR rate of return. I consider it a good investment if it can perform above 10%.

BCE - $1,000 growth

Investing Opportunity Score: 66%

Based on my Opportunity Score formula, BCE (TSE:BCE, NYSE:BCE) has a score of 66% (the higher the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% will have a short window of opportunity unless the stock got beaten down for other qualitative reasons.

I see challenges on the dividend growth front for BCE unless it can amplify its revenue. With low-interest rates, BCE and its high yield have been sought after by income investors wanting safe income. Out of many North American telecoms, BCE has performed quite well since the financial crash of early 2009. Telus leads the pack and Shaw Communications drags behind the group.

BCE vs Competitors

Do you want to find out where the competitors stack up against BCE? There are 7 stocks in the communication services sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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