BCE Stock Offers Value And 6%+ Yield

Canadian stocks are a great way for American investors to add international diversification without straying too far from home. They share similar corporate governance attributes, can pay dividends on a quarterly basis, and in cases like banks, have a more solid dividend track record than their American peers.

This brings me to the Canadian telecom giant, BCE Inc. (NYSE:BCE), which currently trades well off its 52-week high of $59 while giving investors a healthy 6%+ yield. In this article, I highlight what makes BCE a sound buy at present for potentially strong long-term income and returns.

Why BCE?

BCE is Canada’s largest communications company, sitting ahead of Rogers Communications (RCI) and Shaw Communications (SJR). It was formed nearly 4 decades ago, through the integration of Bell Canada, Northern Telecom, and other related subsidiaries.

What sets BCE apart from its peers is that it also has a premier media arm beyond its traditional broadband internet/TV, wireless, and wireline businesses. This includes Canada’s top media channels CTV, V, TSN, and RDS. Additionally, BCE also licenses premium American content: HBO, Showtime, and Starz for the Canadian audience.

BCE recently posted strong fourth quarter results, with robust total net activations of 330K, comprised of 123K mobile phone subscribers, 104K mobile connected devices, and 63K and 40K retail internet and IPTV subscribers, respectively. For the full year, BCE was able to deliver 3.1% revenue and adjusted EBITDA growth, as it was able to weather inflationary pressures with virtually no negative impact to EBITDA margin.

Admittedly, BCE’s legacy landline business continues to be a drag, as its service revenue growth of 3% during 2022 was half the pace of competitor, Rogers Communications. However, it’s worth noting that the true growth story at BCE is its fiber expansion.

BCE continued to support this effort with a record 854K new direct fiber connections in 2022, bringing its total high-speed internet customers to over 4 million, which is nearly double that of its next two biggest competitors. Remarkably, BCE’s fiber footprint now reaches three quarters of Canada’s population. Management highlighted its forward-looking fiber and 5G momentum during the recent conference call:

We plan to invest around C$4.8 billion in 2023 and that’s to support the expansion of our pure fiber footprint to another 650,000 homes and businesses. Approximately, 85% of our planned broadband build-out program will be done. That comprises approximately 10 million total combined fiber and wireless home Internet locations.

By the end of the year, we will have 4 million homes that will be able to access symmetrical Internet speeds of 8 gigabits per second. We will also grow our 5G wireless footprint in 2023 to cover 85% of the national population and will enable low-latency standalone 5G service for 46% of Canadians or 71% of the addressable population.

Meanwhile, BCE carries a strong BBB+ rated balance sheet. While its net debt to EBITDA ratio of 3.3x is somewhat elevated by management’s standards, it’s not unreasonable considering BCE’s fiber buildout and that it, like all telecoms, has been investing in 5G infrastructure. Additionally, BCE has no material debt maturities in 2023, thereby mitigating the impact of higher interest rates at least in the near term.

Importantly, management is focused on capital returns to shareholders as it recently raised its dividend by 5.2%. The dividend is also well-covered at a 40% payout ratio as a percentage of operating cash flows over the trailing 12 months.

Turning to valuation, I find BCE to be attractive at the current price of $45.59 with an EV to EBITDA of 9.1x, sitting at the low end of its range over the past 5 years. Analysts estimate 7% to 12% annual EPS growth over the next 2 years and have an average price target of $52, implying a potential 20% total return over the next 12 months.

Investor Takeaway

BCE is an attractive income stock at its current price, sitting far closer to its 52-week low than high. It has strong fundamentals as it continues to expand its fiber network and 5G capabilities, while carrying a robust balance sheet and paying out a healthy dividend yield. As such, investors may want to take advantage of negative market sentiment around dividend stocks and pick up this quality yield for potentially strong long-term income and returns.