BCE – Dividend Income Appeal

In the current low-interest-rate environment, many investors have gravitated to high-yield high-risk companies. This strategy could very well haunt these investors as these types of investments are susceptible to swift stock price declines and reductions in dividend distributions. Instead of investing in such companies, investors may wish to consider BCE, Canada’s largest communications company for its dividend income appeal. The purpose of this post is to provide preliminary information to aid investors seeking an investment that provides dividend income and an attractive dividend yield.

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BCE has sentimental value for me in that it is the first company in which I held shares.

Back in the mid-1960s, I remember my mother showing me BCE share certificates which she kept in a safety deposit box at the bank. She explained to me that I owned a very tiny piece of a company that generated income from people who made phone calls. In my mind, I took that to mean that the telephone pole in front of our house belonged to me.

I remember her showing me the monthly phone bill and telling me a portion (albeit minuscule) of our monthly phone bill payment would be sent to me 4 times a year. She also explained that I would receive a portion of the Bell phone bill payments made by millions of Canadians who were BCE customers.

Fast forward a few decades later and I still receive a portion of phone bill payments made by BCE customers!

I also distinctly recollect an attempt by The Ontario Teachers Pension Plan to take BCE private. These are the key dates in the saga of the failed BCE buyout.

At the time of this attempted buyout, I was a member of my former employer’s Corporate Cash Management team. One of our key clients was the depositary appointed in connection with this transaction.

After considerable work by all parties in preparation for what would have been the largest dollar value acquisition in Canadian history, the closing fell through after it was concluded that the BCE entity that would emerge from the buyout would fail a solvency test because of the huge debt load involved in the deal.

Fast forward almost 1.5 decades later and I am forever grateful BCE was never taken private!

BCE was my 23rd largest holding at the time of my April 2021 overall portfolio analysis. In addition, I closely track my dividend income and my records reflect that my BCE holdings generate a reasonable amount of quarterly dividend income to cover some of our living expenses during retirement.

BCE – Business Overview

The history of Canada’s oldest phone company is accessible here.

BCE, Canada’s largest communications company, provides residential, business and wholesale customers with a wide range of solutions for all their communications needs.

Results are reported in three segments: Bell Wireless, Bell Wireline and Bell Media.

Bell Wireless provides wireless voice and data communication products and services to residential, small and medium-sized businesses and large enterprise customers as well as consumer electronic products across Canada.

Bell Wireline provides data, including Internet access and Internet protocol television (IPTV), local telephone, long-distance, as well as other communication services and products to residential, small and medium-sized business and large enterprise customers, primarily in Ontario, Québec, the Atlantic provinces and Manitoba, while satellite TV service and connectivity to business customers are available nationally across Canada. This segment also includes BCE’s wholesale business, which buys and sells local telephone, long-distance, data and other services from or to resellers and other carriers.

Bell Media provides conventional TV, specialty TV, pay TV, streaming services, digital media services, radio broadcasting services and out-of-home (OOH) advertising services to customers nationally across Canada.

BCE holds investments in several other assets, including:

• a 28% indirect equity interest in Maple Leaf Sports & Entertainment Ltd. (MLSE)
• a 50% indirect equity interest in Glentel Inc. (Glentel)
• an 18.4% indirect equity interest in entities that operate the Montreal Canadiens Hockey Club, evenko and the Bell Centre in Montréal, Québec, as well as Place Bell in Laval, Québec

I highly encourage investors to, at the very least, read sections 1 – 3 in BCE’s FY2020 Annual Report (commencing on page 35 of 176) to gain an understanding of the company.

Canadian Wireless Market

According to a 2019 report by the Canadian Radio, Television, and Telecommunications Commission (CRTC), Canada’s telecom giants (Bell, Rogers, and Telus) together control ~90.7% of Canada’s wireless market.

In 2014, the Canadian government auctioned off new segments of the wireless spectrum to boost competition. Many of the new smaller companies, however, were subsequently acquired by Canada’s telecom giants.

• BCE bought Virgin, Lucky Mobile, and Solo Mobile
• Rogers bought Fido and Mobilicity
• Telus bought Public Mobile and Koodo

While Canadian Alexander Graham Bell invented the phone, and Canada has been a world leader in telecom technology, Canadians are paying some of the highest wireless rates in the world.

In April 2021, Finland-based Rewheel Research released a wireless pricing report in which it focused on whether Canada is the most expensive wireless market in the world. In its report, it concludes that Canada has among the highest monthly/gigabyte prices. The root cause of the high Canadian wireless prices is that the Canadian wireless market is a de-facto network duopoly.

5G Spectrum Auction

It is bad enough that Canadians already pay more than almost everywhere else in the world for wireless service! Now we have to contend with Bell, Rogers, and Telus trying to recoup the billions they recently spent to acquire wireless spectrum.

On July 29, BCE announced that through an auction, it secured prime 3500 MHz spectrum in urban and rural markets across Canada and acquired 678M MHz-POP (this means the amount of megahertz of spectrum multiplied by the population within a specified service area) for $2.07B. For this price, BCE acquired 271 of the available licences bringing its total share of the 3,500 MHz market to 37%; some 3,500 MHz spectrum had been previously allocated in an earlier auction, well before 5G technology had been envisioned, let alone been identified as needing spectrum at that range.

Rogers Communications Inc., BCE’s main national telecom rival, spent the most at $3.3B to acquire 325 licences.

Following the results of the auction, BCE’s CEO/President has called on the Canadian federal government to review the way it allocates wireless spectrum in the wake of a record-breaking bidding war for a key frequency to power next-generation 5G networks; this auction netted the Federal government $8.9B.

He contends that the government is trying to drive prices lower but at the same time has designed an auction that is going to make that goal very difficult to achieve.

In his recent comments, he expressed annoyance with how Quebecor Inc. was treated under the rules, which he said tilted the tables for the Quebec-focused telecom provider. 

The way [the government] designed the auction actually ended up being an implied subsidy of $4B for regional wireless players. That’s $4B that Canadian taxpayers basically subsidized to regional players, and some of these regional players are dominant in their own right: you just have to think of the Quebec wireless player that picked up a lot of set-aside spectrum.

The way the auction was designed basically handed $2.3B in taxpayer money to Quebecor based on the differential between the prices the national players paid and the prices that they paid for the same spectrum.

Under auction rules, there is a spectrum set-aside. This is a mechanism used to support competition by ensuring that a minimum amount of spectrum is effectively reserved for a certain sub-set of entities.

Up to 50 MHz of spectrum was earmarked for telecom providers other than Bell, Rogers and Telus in a bid to contribute to the competitive environment. Quebecor, through its Vidéotron division, was eligible for those set-asides; it picked up 294 blocks for almost $0.83B – a fraction of the cost paid by the Big 3.

Furthermore, more than half of the investment made by Quebecor was in four non-core provinces: Ontario, Manitoba, Alberta and British Columbia; Quebec is Quebecor’s home province.

BCE’s CEO/President has stated that a thorough rethink is in order if supposed regional players are given preferential access to spectrum nation-wide and goes on to say:

If you have restricted supply, and then within that restricted supply you’ve set up a framework that is designed to restrict the supply even further by giving preferential access to that spectrum to only certain players like the regional players, you are going to get the tension that you saw and the prices that you saw.

Accelerated Capital Investment Plan

On May 31, BCE announced a $0.5B increase to its accelerated capital investment plan announced earlier in 2021. BCE will now deploy $1.7B for 2021 and 2022 in addition to the ~$4B in capital that BCE has typically invested each year in network expansion and enhancement over the last decade. This increase is in response to the support for infrastructure investment reflected in recent federal regulatory and policy decisions.

With an additional $0.2B also invested in 2020 to respond to the unprecedented usage demands of the COVID-19 crisis, BCE’s total capital investment from 2020 – 2022 is expected to be as high as $14B.

This investment will significantly increase the number of wireline and wireless connections in Canada’s rural and urban centres over the next 2 years. It will also include significantly expanded plans for all-fibre connections while creating additional employment as network construction activity accelerates

BCE – Financial Review

NOTE: Shares are publicly traded on the Toronto Stock Exchange and the New York Stock Exchange (TSX, NYSE: BCE). Since financial results are reported in Canadian dollars, all information reflected herein is in Canadian dollars.

BCE’s Q2 2021 Shareholder Report is accessible here and the accompanying Earnings Presentation is accessible here.

The following images provide a quick snapshot of how BCE performed in Q2.

FY2021 Guidance

On the Q2 2021 Earnings call with analysts, reconfirmed 2021 financial guidance targets.

BCE – Credit Ratings

Any investment should be approached from a risk/reward perspective. Far too often, however, investors fixate on the potential reward without realizing the potential reward is not commensurate with the risk being assumed.

As a common equity investor, I am fully aware I bear a higher degree of risk than unsecured senior debt holders. I, therefore, look at the ratings assigned to a company’s unsecured senior debt by the major rating agencies to gauge my degree of risk.

If non-investment grade ratings are assigned then I deem the company to be too risky for my conservative nature.

Looking at BCE’s existing credit ratings, we see Moody’s, S&P Global, and DBRS assign ratings that are the top tier of the lower medium grade investment-grade category.

All 3 ratings define BCE as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for BCE to meet its financial commitments.

BCE’s ratings are satisfactory for my purposes.

BCE – Dividends and Share Repurchases

Dividends and Dividend Yield

BCE offers investors:

• a reliable stream of dividend income that is well covered from profits generated through normal business operations;
• a relatively consistent track record of dividend increases after The Financial Crisis; and
• an attractive dividend yield.

On February 4, 2021, BCE announced a 5.1%, or $0.17, increase in the annualized dividend payable on BCE’s common shares for 2021 to $3.50/share from $3.33/share in 2020, starting with the quarterly dividend payable on April 15, 2021. This represents BCE’s 17th increase to its annual common share dividend since 2009 and a total increase of 140%. This is also BCE’s 13th consecutive year of 5% or better dividend growth.

The firm has a 100 year streak of paying dividends and it also a Canadian Dividend Aristocrat.

With BCE shares currently trading at ~$63.70, investors receive an attractive ~5.5% dividend yield based on the current $3.50/share annual dividend.

BCE’s stated objective is to seek to achieve dividend growth while maintaining a dividend payout ratio within the target policy range of 65% – 75% of free cash flow and balancing strategic business priorities.

In 2020, BCE’s dividend payout ratio was 89%. This was higher than the policy range due to the impact of the COVID-19 pandemic.

BCE has also disclosed that due to a planned acceleration in capital expenditures (discussed earlier) and ongoing financial impacts of the COVID-19 pandemic expected in 2021, the dividend payout ratio is expected to remain above the target policy range in FY2021.

Share Repurchases

The weighted average number of shares outstanding in FY2011 – FY2020 (in millions) is: 772, 775, 776, 795, 848, 870, 895, 899, 901, and 904. For the 6 months ending June 30, this level has risen to 904.7.

Investors should not expect the share count to decline in the foreseeable future as BCE has far greater priorities at hand.

BCE – Current Valuation

When BCE released Q4 results on February 4, 2021, it reported FY2020 adjusted diluted EPS of $3.02 and forecast FY2021 adjusted diluted EPS of $3.05 – $3.20.

At the end of Q2, BCE has generated $1.61 in YTD adjusted diluted EPS so it does not seem unreasonable that FY2021 adjusted diluted EPS will fall within guidance.

Using the current ~$63.70 share price and the ~$3.13 midpoint of guidance, we get a current forward-adjusted diluted PE of ~20.4.

In addition, adjusted diluted EPS guidance from 17 brokers is:

• FY2021 – a mean of $3.20 and a low/high range of $3.11 – $3.30. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~20.
• FY2022 – a mean of $3.38 and a low/high range of $3.09 – $3.53. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~18.85.

The current valuation appears to be slightly on the high side for a slow-growth company. The current low-interest-rate environment and the herd mentality are likely contributing factors to the surge in BCE’s share price after the beginning of February 2021.

BCE – Dividend Income Appeal – Final Thoughts

I view BCE to be fairly valued with limited opportunity for short-term capital appreciation before shares become overvalued.

If your investment time horizon is much like mine (very long-term), I think you can do far worse than purchasing BCE shares within a range close to the current share price.

A big ‘plus’ for BCE investors is the attractive ~5.5% dividend yield.

Despite my positive outlook on BCE, I have sufficient exposure to the company and will not be acquiring additional shares at this juncture.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom.

Thanks for reading BCE – Dividend Income Appeal!

Disclosure: I am long BCE.

Other articles by Charles Fournier include Raytheon Technologies – Fairly Valued and BMO – High Dividend Yield and Safety from Canada’s Oldest Bank.

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Author Disclosure: I disclose holdings held in the FFJ Portfolio and the dividend income generated from these holdings. I do not disclose details of holdings held in various tax-advantaged accounts for confidentiality reasons.

Author Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.