BCE: 5 Reasons to Buy Canada's Dividend Champ

06/28/2016 10:00 am EST


Deon Vernooy

Chief Investment Strategist, Canadian Edge

This stock — a core holding in our Dividend Champions portfolio — is the largest of the Canadian telecom and media companies; in fact, this was the first stock that we selected in May 2015 when we put the initial portfolio together, notes Deon Vernooy, editor of Canadian Edge.

One year later, BCE (BCE) has delivered a total return of 19%. In our view, the stock remains undervalued, with an attractive yield and reasonable growth prospects. We plan to hold for the long term, for five key reasons:

1) Fortress

The telecommunications and media industries in Canada are, as in most other countries, highly regulated. This has its drawbacks, but it also creates a protected environment for the incumbents and hurdles for new competitors.

We estimate that BCE spent around C$20 billion over the past five years reinforcing their competitive position. Any competitor has to think twice before entering a market where the leader has that much of a head start.

2) Diversified customer base

BCE counts more than 21 million active users of their landline, Internet, wireless and TV services. And BCE knows how to retain customers, as evidenced by their very low customer churn rate.

3) Cash cow

BCE converts a high proportion of its revenue into cash (currently around 32%) and generates ample free cash flow that easily covers dividend payments.

4) Prudent capital allocation

We continue to be impressed with BCE’s skill at allocating capital. Apart from making targeted investments in new spectrum licenses and building out infrastructure, the company also makes regular bolt-on acquisitions.

In 2014, the company spent C$3.95 billion on a minority stake in Bell Alliant, the eastern Canada phone, Internet, TV and wireless provider. More recently, it proposed a takeover of Manitoba Telecom.

5) Reasonable valuation

BCE is a complex business with numerous moving parts, but the company seems to be able to manage ongoing transition and competition in all aspects of the business very well.

Overall, this is a true dividend champion with modest growth prospects. BCE has an excellent track record of sustaining and growing dividends stretching back over 60 years. For the past 10 years, dividends — now yielding 4.4% — have grown 7% per year on average.

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By Deon Vernooy, Editor of Canadian Edge

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