BCE share: a bond-like substitute
When it comes to seeking reliable income, there are a few industries that tend to provide safe and reliable dividends. In Canada, these are generally banks, telecommunications and utilities. Why these three in particular? Indeed, regulation is such that industry leaders hold a dominant market share.
A good example of this is BCE Inc (ECB), the largest telecommunications company in the country. BCE forms an oligopoly with Telus (YOU) and Rogers Communications (ROI). Together, these companies dominate, with more than 90% of the Canadian market.
For its part, BCE has about 10 million customers, which represents about 30% of the market. Despite the dominant position of the company, I am neutral on the company.
Mixed fourth quarter results
In early February, BCE announced mixed results for the fourth quarter of fiscal 2021 and year-end results. Fourth quarter profit of CA$0.76 was beaten by CA$0.03 and revenue of CA$6.21 billion missed by CA$18 million. Adjusted EBITDA was also around one percentage point lower than expected and EBITDA margins missed 30 basis points.
To end the year, the wireline segment accounted for 54% of total EBITDA, while wireless accounted for 39% and media provided the remainder. While the numbers were okay, there is a considerable lack of growth in the business.
Revenue in fiscal 2021 was only up 2.4% from fiscal 2020, and the company’s five-year annual average is just 1.54%. Similarly, Adjusted EPS was only up 5.6% last year and, thanks to the pandemic, is at a five-year annual average of -2.17%.
The good news is that growth is expected to pick up in fiscal 2022. Analysts expect adjusted EPS and revenue growth of 9.5% and 3.2%, respectively. Although this does not attract many growth investors, it is significantly higher than historical averages.
5% dividend increase
Along with the fourth quarter results, BCE announced a 5% increase in the dividend. The increase is in line with historical averages and effectively extends the dividend growth streak to 14 years. While this may not seem like a long streak, it should be noted that a failed takeover attempt by the Ontario Teachers’ Pension Plan in the mid to late 2000s resulted in a stagnant dividend.
Had this failed takeover not occurred, BCE’s streak would be north of 20 years. Interestingly, in recent years, BCE’s payout to earnings ratio has exceeded 100%. Today, the dividend represents ~115% of profits.
While this is certainly a red flag, it should be noted that pandemic-related charges have had a negative impact on income statements across the country. In fact, BCE’s payout ratio has only exceeded 100% since the start of the pandemic. That being said, it was on the rise before the pandemic as dividend growth rates outpaced earnings growth.
While it’s worth watching, if you dig deeper, there’s no immediate reason to worry. As a telecommunications company, BCE has significant amortization and depreciation costs that negatively impact earnings. These have no impact on cash flow and as such have little effect on the company’s ability to pay the dividend.
That’s why I prefer to compare the company’s payout ratio to cash flow. Today, the dividend only represents 41% of free cash flow, a much more sustainable ratio.
The Taking of Wall Street
According to Wall Street analysts, BCE gets a moderate buy consensus rating based on four buy, four hold and no sell ratings.
BCE’s average price target of $53.68 puts the upside potential at 2.6%.
With a beta of 0.34, a dividend yield of around 5.6% and low single digit growth, BCE is more suitable for the defensive investor. The size of the company allows it to ward off any emerging competitors, but it is also too large to achieve significant growth. BCE is a bond-like substitute that offers small growth and above-average yield.
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