BCE (TSX:BCE) is one of Canada’s leading telecom companies. It shares the space with few others, as this industry exists in an oligopoly, which means only a handful of companies control the landscape. This means BCE is protected, with strong pricing power and a strong moat. Despite this, BCE stock has not performed well in the last many years.
Is it losing its edge, or is it now actually the best time to buy in a long time?
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BCE stock is cheap
There’s no other way to put it: BCE stock is simply cheap. Trading at 16 times earnings and with a 7.84% dividend yield, there have been few better times to buy this quality stock than now. But what has gotten us here at a point where BCE is down 15% since the end of 2022 and so cheap?
Well, as you know, interest rates have risen, and the economy is not as booming as it once was. These two factors have taken a toll on BCE’s stock as well as its financial results. In fact, the company reported a 20% decline in net earnings to $2.3 billion in the fourth quarter of 2023. This was due to items such as higher interest expense as well as a $204 million non-cash loss on BCE’s joint venture equity investments.
This result brought an already cheap BCE stock down another 3.8% last week. It also brought us to this opportunity to buy this stock that actually has strong underlying operating fundamentals behind it.
Operationally strong
BCE’s fourth-quarter and year-end 2023 results demonstrate strength in the company’s core businesses. We can see this reflected in its 2.1% increase in operating revenue in 2023 to $24.6 billion. This is also evident in BCE’s 5.3% increase in adjusted earnings before interest, taxes, depreciation, and amortization and operating cash flow of $2.37 billion in the fourth quarter. But what’s driving this?
Simply put, BCE is seeing strong underlying trends, with 128,715 mobile phone prepaid additions in 2023. While churn is higher, the average revenue per user increased 0.4% to $58.71. Positive trends are being driven by immigration, continued 5G and bundling momentum, as well as promotional activity.
BCE: Building the future of telecommunications
BCE boasts an unmatched network, with the fastest and farthest-reaching broadband internet connection. Also, BCE has a leading position in fibre optics, which is expanding rapidly as well as in 5G, which is on track to grow to 85% penetration in Canada. All of this will ensure that the company maintains its edge for years to come.
Recent layoffs were disheartening news to get from this Canadian telecom giant, but the hope is that the company will be in a better position on the other side of this. For dividend investors, BCE’s dividend continues to go strong. With 40 years of dividend payments under its belt and a 5% or higher dividend increase in each of the last 15 years, BCE has an enviable dividend track record. Although its most recent increase was lower, at 3.1%, the company is managing its way in a changing and uncertain environment for telecom companies.
The bottom line
So, BCE stock is highly undervalued relative to its earnings and cash flow. But it’s also undervalued relative to its historic valuation. If we add the company’s exceptional dividend growth track record and its 7.8% dividend yield, the stock looks increasingly interesting.
