BCE Inc. shares have been on a roll since the telecom company reported upbeat second-quarter financial results last week, pushing the share price toward new heights with year-to-date returns that are outpacing peers’.
The best reason to join the rally now: BCE’s dividend yield is still hefty, at 5.5 per cent, offering an attractive alternative to paltry yields on fixed income and a better payout than most other blue-chip dividend stocks.
Clearly, investors are catching on to the deal here.
The share price has risen nearly 17 per cent this year, or about five percentage points better than Telus Corp. over the same period and more than double the gain of Rogers Communications Inc.
BCE closed at $63.67 on Wednesday, approaching previous peaks in 2019 and early 2020, when the shares briefly rose above $64.
The high price suggests that the stock is hardly a bargain right now.
Valuation measures point to the same conclusion. The stock’s price-to-earnings (P/E) ratio, based on estimated 2021 earnings from BMO Capital Markets and CIBC World Markets, is 19.8.
That’s higher than most of its telecom and cable peers in Canada and the United States, and lofty for a mature company in a slow-growing sector.
Comparing BCE’s enterprise value (EV) to its earnings before interest, taxes, depreciation and amortization (EBITDA) – a popular approach among analysts – shows a similarly stretched valuation.
Nonetheless, the stock may be worth a second look.
For starters, BCE’s second-quarter results showed that this is a thriving company that can deliver solid profits even when the economic backdrop is unclear, competition is strong and interest in traditional broadcasting and wired phones is faltering.
Operating revenues rose 6.4 per cent over the same quarter last year, and EBITDA – adjusted for severance, impairment and acquisition costs – rose 6.2 per cent.
The company added 44,433 net new “post-paid” mobile phone customers, who are billed at the end of each month, exceeding analysts’ estimates. What’s more, the average billing per user (ABPU) increased by 3.3 per cent.
Though Rogers and Telus added more wireless customers in the second quarter, their ABPUs trailed BCE’s, suggesting BCE is doing a better job at attracting more valuable customers.
BCE looks attractive next to Canadian peers in other ways as well. Telus is a pricier stock, based on P/E ratios and EV/EBITDA multiples. And Rogers is in the midst of a $20.4-billion deal to buy Shaw Communications Inc., which has weighed on Rogers’ share price since the deal was announced in mid-March.
But the biggest attraction is BCE’s dividend, which can cut through the usual telecom complexities related to everything from 5G rollouts to spectrum auctions.
The 5.5-per-cent dividend yield is a lot fatter than Rogers’ 3.2 per cent and about a full percentage point more than Telus’s 4.5 per cent – and higher than most dividend yields beyond the telecom sector. The dividend continues to rise, too: BCE boosted it by 5.1 per cent in April, in keeping with annual raises in recent years.
To be fair, Telus has been raising its dividend twice a year since 2019, with the goal of producing annualized increases of 7 to 10 per cent through to the end of 2022.
As well, BCE’s payout ratio is abnormally high right now, at 110 per cent. In other words, the company is distributing to shareholders more money than it is bringing in in the form of profits.
Analysts don’t see this as a problem, though. Cash flows should improve substantially by 2023, as BCE winds down its two-year program of capital spending related to the rollout of its 5G network – all but ensuring that the dividend will continue to rise.
Is the stock a great deal at its current elevated level? Well, no. Even bullish analysts see relatively modest gains from here.
But as bond yields remain low and questions arise about whether the economic rebound may be losing some steam, BCE looks like a standout source of income and stability.
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