BCE (TSX:BCE) is down more than 16% in 2024 and off nearly 40% from the 2022 high. Contrarian dividend investors are wondering if BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio focused on high-yield stocks.
BCE share price
BCE trades near $45 at the time of writing. This isn’t far from the 10-year low the stock recently reached and is way off the $74 the share price hit in 2022 at the height of the rally after the 2020 market crash.
BCE spends billions of dollars every year on capital projects that include the upgrade and expansion of its wireless and wireline networks. Debt is used to finance part of the funding required for these initiatives, so the steep rise in interest rates that occurred through 2022 and most of 2023 has had an impact on borrowing costs. Higher debt expenses cut into profits and can reduce the amount of cash that is available for distributions to shareholders. This is part of the reason BCE only raised the dividend by 3.1% for 2024, compared to an average annual increase of about 5% over the previous 15 years.
The Bank of Canada recently cut its interest rate by 0.25%, and more reductions are expected later this year or through 2025. This should ease pressure on BCE and could start to bring interest back into the stock from income investors who might have sold it to park their cash in safer Guaranteed Investment Certificates (GICs) that saw rates go as high as 6%.
BCE has faced some operational challenges as well. The media group has struggled with falling advertising revenue in the radio and television segments. BCE sold or closed dozens of radio stations last year and trimmed TV programming to adjust to the market conditions.
Price wars for mobile plans and regulatory uncertainty likely also played a part in the decline in the share price.
Upside
BCE announced staff cuts of about 6,000 positions over the past year to reduce costs and to position the business to meet financial goals. Digital revenue is rising in the media operations, and the media group as a whole should stabilize after the expense reductions.
BCE expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be in line with last year or slightly higher. Lower debt costs and reduced operating expenses across the company should help support 2025 results.
Dividend safety
Investors who buy BCE at the current share price can get a yield of 8.8%. When yields get this high on a stock the market might be signalling the anticipation of a cut to the distribution. No dividend is 100% safe, so investors need to be comfortable with the risks.
BCE remains very profitable and the dividend should be safe as long as there isn’t a big hit to revenues in the next few years. That being said, If BCE is forced to trim the distribution the stock could tank.
Should you buy BCE now?
Falling interest rates and the impact of lower operating expenses should provide support in 2025. Ongoing volatility is expected in the near term, but the stock is likely oversold at this point, given the outlook for a soft landing of the economy. Even if the share price doesn’t move much to the upside, the current 8.8% yield provides a solid return.
Contrarian investors who are comfortable with the risks and are seeking high-yield passive income might want to start nibbling here and look to add to the position on additional downside.
