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If there were a word to describe how the market has fared this year, it would be volatile. The rising interest rates and inflation we’ve seen in the past few years have taken their toll on the market and individual stocks. But there is one stock down 12% this year that might be worth looking into.
That stock is BCE (TSX:BCE), and here’s why you should consider it now.
Meet BCE, a troubled but promising stock
Most Canadians are aware of BCE. The company is one of the largest telecom stocks in Canada, with a massive network that stretches across the country. BCE offers investors the usual gambit of services, which include wireless, wireline, TV, and internet.
In addition to its core subscriber business, BCE also boasts a large media segment, which includes radio and TV stations across the country. This provides an alternative yet complementary source of revenue for the company.
Operating a telecom is an expensive business, and in recent years, it’s become even more expensive. BCE’s multi-year effort to roll out its fibre network is an expensive endeavour, which became more expensive as interest rates rose.
As a result, over the past five-year period, BCE’s debt has ballooned from $18.7 billion to a whopping $39.5 billion earlier this year. Additionally, competition between Canada’s telecom companies in a “race to the bottom” in prices has resulted in lower margins.
The result is BCE, even with its massive defensive moat, needs some serious changes. That’s also part of the reason why BCE is a stock down 12% this year.
Things are changing at BCE
Fortunately, management realizes things need to change. Earlier this year, BCE announced the largest restructuring program in recent memory. First, the company sold off 45 of its 103 regional radio stations.
Then BCE proceeded with a massive round of layoffs, impacting all levels of the company. In total, BCE laid off 4,800 employees. That’s the largest restructuring effort at BCE in three decades.
The changes are part of a larger transformation at the company as it shifts to a more digital operation. Apart from the cost-cutting appeal of the lay-offs, the sale of BCE’s assets will help to reduce its overall debt.
The most recent sale came just a few weeks ago. BCE announced last month it was selling its ownership stake in Maple Leaf Sports and Entertainment to its big telecom peer, Rogers Communications, for a whopping $4.7 billion.
Fortunately, these changes are having an impact. BCE’s lower operating costs and fiscal tightening helped the company post net earnings of $604 million in the most recent quarter, reflecting a 52.1% over the prior period
Free cash flow also saw an increase, coming in 8% higher at $1,097 million.
Apart from the impact of cost-cutting measures, BCE’s subscriber business churned out positive gains. The wireless segment witnessed its highest quarterly prepaid net activations in two years, coming in at 52,543 for the quarter.
The gains are impressive, but does it help prospective investors looking concerned with the stock down 12% this year?
What about the dividend?
Another key point for investors to consider is BCE’s dividend. As of the time of writing, BCE pays out an extremely juicy 8.70% yield. This makes it one of the best-paying dividends on the market right now, but the fact that BCE stock is down by 12% this year weighs heavily on prospective investors.
BCE has paid out dividends for well over a century without fail. The company has also provided annual upticks to its dividend for over a decade.
Part of the reason why that yield is so high is because BCE is a stock down 12% this year. In fact, the company is now paying out more than it generates in free cash flow, which is concerning for the future unless you focus on the long term.
BCE stock is down 12% now, but does it matter over the longer term?
BCE should be seen as a long-term investment that has weathered multiple slowdowns and changes over the past century. The company’s efforts to rein in costs are already bearing fruit.
In my opinion, BCE is a great stock to own, provided it’s for the long term. Buy it now while it’s still down, enjoy that dividend, and wait for the recovery to come.
