BCE (TSX:BCE) is trading near a five-year low. The steep drop in the share price in recent months has existing and potential investors wondering if BCE stock is now undervalued and a contrarian buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
BCE overview
BCE is Canada’s largest communications company, with a current market capitalization near $46 billion. The wireless and wireline network infrastructure provides mobile, internet, TV, and security services to millions of Canadian residential and commercial clients. These services are required in all economic situations, so the revenue stream should be reliable through an economic downturn.
BCE’s media group, however, is a different story. The division owns a television network, specialty channels, radio stations, and interests in sports teams. Advertisers are trimming marketing budgets to protect cash flow as rising interest rates drive up debt costs. Customers might also be allocating more ad spending to social media alternatives. BCE’s digital platforms, at least, are growing ad revenue.
BCE stock price
The stock trades close to $50.50 per share at the time of writing compared to more than $65 earlier this year.
The recent dip below $50 brought BCE stock back to a price not seen since the pandemic plunge in 2020.
Impact of interest rate hikes
BCE spends billions of dollars each year on capital projects, including its fibre-to-the-premises initiative and the expansion of the 5G network. These investments should enable BCE to drive long-term revenue growth while helping protect the company’s competitive position in the market.
BCE uses debt to fund part of the capital program. As interest rates increase, the cost of borrowing rises. This can put a dent in profits, as is expected this year, and potentially reduces cash available for dividends.
BCE is popular with income investors. The sharp jump in rates offered by no-risk alternatives, like Guaranteed Investment Certificates (GICs) might be another reason for the decline in the share price. Investors want a risk premium for owning stocks. As rates rise on GICs, the share prices of dividend stocks tend to fall, thus driving up the dividend yield.
The Bank of Canada is raising interest rates in an effort to cool off the economy and get inflation under control. Additional rate hikes are possible, but the cycle should be nearing its peak. As soon as interest rates begin to fall again, the rates offered on GICs will decline, and that should drive money back into top dividend stocks, including BCE.
BCE dividend
BCE increased its dividend annually by at least 5% over the past 15 years. The company expects operating revenue and free cash flow to rise in 2023, so the dividend should be safe. Investors who buy BCE stock at the current level can get a 7.7% dividend yield.
Is BCE stock a buy today?
Ongoing volatility should be expected until there is clarity regarding the end of rate hikes by the Bank of Canada. Existing shareholders should probably ride out any additional turbulence or use the dip to add to the position. Investors who don’t have BCE in their portfolios might want to start nibbling at the current price. The stock appears oversold, given the stability of the core mobile and internet subscription businesses, and you get paid well to wait for the rebound.
