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Stock Analysis - BCE (Bell Canada Enterprises) Inc.

Initial Screening

All figures presented will be in CAD unless otherwise stated though BCE is traded on both the Toronto Stock Exchange and the New York Stock Exchange.

Data collected as of 3/23/2020

Market Cap: 41.9970 Bil (Large Cap)

Sector: Telecom | Communication Services

Dividend Yield: 7.45%

Forward PE: 14.51

Price to Book: 2.74

Price to Sales: 1.95

Revenue

Bell’s Revenue has been increasing every year since 2010. Over the last 5 years, it grew 11.39% from 21.51 billion to 23.96 billion. According to their most recent annual report, each of BCE’s three business segments contributed to the growth in revenue in 2019: Wireline (50.4%), Wireless (37.9%) and Bell Media (11.7%). More on the segments below (see Business Model).

Cash Flow and Debt

The company's free cash flow nearly doubled between 2015 and 2019, as the company managed to increase it by more than 88%.

Over the same time span, the company's short and long term debt rose gradually by 29.63% from 20.285m to 26.296m.

Business Model

As mentioned above in Revenue, BCE’s business is divided into three major business units. The following sections will break down each business unit and its placement in the current market.

Wireless

Overall, wireless revenues are generated from prepaid and postpaid subscriptions as well as payment plans for devices such as newer phones or laptop models. Bell and Telus are the two leading wireless providers in Canada. Together with their Bell branded service, BCE also offers low-cost plans via Lucky Mobile which saw a 253% increase in subscribers from 2018-19.

Wireline

The wireline segment covers consumer and business solutions for high-speed internet including the Bell fibre optic network (now referred to as Bell Fibe) which was recognized by PCMag as Canada's fastest Internet provider in 2019. Additionally, Bell Business Markets aims to take on leadership in connecting Canadian businesses with Cloud solutions and services from Amazon, Google, Microsoft, and IBM.

Bell Media

Bell Media is one of Canada’s leading content creators and distributors. Their assets span over several media outlets including television, radio and digital media. Their revenues are mostly derived from advertising and subscription fees.

Dividend Growth and Sustainability

BCE’s dividend yield as of 3/23/2020 is 7.45%, a considerable starting yield for a Canadian blue-chip company. The current pricing and the dividend’s room to grow based on underlying fundamentals makes BCE an attractive option for dividend growth investors.

Below you’ll see a more in-depth analysis of the financial including the dividend history and sustainability from recent years.

Year EPS Dividend Payout Ratio
2019 3.37 3.17 94.64%
2018 3.10 3.02 97.79%
2017 3.12 2.87 87.77%
2016 3.33 2.73 85.36%
2015 2.98 2.60 84.74%

Dividend History & Growth

BCE introduced a dividend in 1996 and has grown it every year since 2008 resulting in an 11-year streak of dividend growth. The dividends are paid out quarterly with an increase to be expected in the first quarter of every year. Shareholders saw a 128% increase in dividend per common share between 2009 and 2020. The latest dividend increase was announced in Q1 2020 at 5%.

Payout Ratio

The payout ratio of BCE’s dividend is quite high ranging from 84.7% in 2015 to 97.8% in 2018. It’s slightly higher than the payout ratio from its Canadian competitor Telus (TSE: T / NYSE: TU) but lower than its US counterpart AT&T (NYSE: T). The whole telecommunication sector tends to have higher payout ratios, but given the fact that the 5-year average payout ratio for BCE is 89.4% and never crossed 100% signals that the dividend is safe and that there is some room for growth.

SWOT Analysis

Strength

Over the last year, BCE was able to grow its wireless and high-speed internet subscriptions by 3.6% and 4.3% respectively. Continued growth in these areas with a great future outlook can be considered a strength for BCE and should be able to pick up the declining numbers of local residential phone subscriptions. Furthermore, Bell Media proves to be a provider of engaging content. With their streaming service Crave they are the exclusive Canadian partner for HBO productions like Game of Thrones.

Furthermore, TSN is one of the most popular sports streaming services in Canada and the only way for Canadians to follow their favorite MLS teams live. Other streaming services may be able to broadcast the games but have to wait for at least 24hrs after the games to do so.

Weakness

Debt and an environment of rising interest rates is a weakness for any telecommunications company. The preparation for 5G as well as extensions in terms of service coverage are significant upfront investments that can only be paid off in the long term by steady business growth.

Rising interest rates could impact the huge amount of debt Telecommunication companies have. Analysts expect BCE’s debt to decrease in the years to come and the interest rate cuts during the pandemic have caused somewhat of a relief. But with the uncertainty of the market post-pandemic, I still think an environment of rising interest rates or economic downfall is a threat for BCE.

Opportunity

An opportunity I see for BCE lies within the growing Canadian population. This factor has the potential to add demand for coverage and services across Canada. By providing one of the top coverages across the country, BCE has a great opportunity to grow subscriptions in all of its business units.

One of the biggest opportunities along with the growing population is the extension of Bell Fibe in the Greater Toronto Area. With a population of over 6 million, this area is one of the densest in Canada, housing over 15% of the total population. Offering greater coverage in Toronto should increase in a boost in service subscriptions especially considering BCE’s main competitor Rogers has a history of outages and problems.

Threat

Customer trust is one of the greatest liabilities for service providers in the digital age. Security and privacy incidents, such as the data breach Bell experienced in early 2018, can have a huge impact on consumer trust and in turn market share.

Conclusion

Judging by the strong fundamentals of the past years as well as potential growth opportunities, BCE is a staple for the telecom sector in my portfolio. As long as they can control their debt while preparing for 5G, I think the stock has a great future and offers a great starting yield and solid growth history for dividend growth investors.

I highly recommend every potential investor read BCE Annual Report as it’s an easy to understand overview of their business outlining and including latest industry trends as well as potential future outlooks and risks.

The question you’ll also need to answer is if BCE is the right holding for your portfolio. I think recent weaknesses in the stock price are triggered more so by the market sentiment as opposed to the underlying fundamentals. If you are an investor based in the US and want to invest in the Canadian telecommunications sector, BCE may be a great listing to give you an entry into the market as it's listed on the NYSE and TSE.

Thank you for making it through my stock analysis of BCE. I invite you to share any feedback you have to offer to help me improve future research.

Disclaimer

I hold long positions in Bell Canada Enterprises Inc (TSE: BCE). This article expresses personal opinions and observations of someone who is not licensed to provide financial advice. I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article other than the long positions I own. Furthermore, I cannot guarantee the accuracy of the financial metrics gathered from 3rd party services like Morningstar and Yahoo Finance.

Sources

Financial Metrics

MorningstarYahoo FinanceMarketScreener

Company information and publications

Investor Relations

Other

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