BCE Inc. Stock Looks Attractive Long Term

BCE Inc. (TSX: BCE) stands out among its peer due ARPU growth and its superior dividend yield

SmallCapPower | July 11, 2017: Long-term investors should consider investing in the telecom behemoth BCE Inc. (TSX: BCE), which continues to exhibit healthy fundamentals. The recent correction of ~9% from the 52-week high of $63.41 seems to be a good entry point for investors.

Investment Thesis

  • A diversified enterprise with multiple business streams including telecom, media, and sports
  • Generates healthy average revenue per user (ARPU)
  • Future synergies with MTS acquisition
  • Healthy cash flows and high dividend yield

Diverse business streams 

BCE is a well-diversified organization with a commanding position in the wireless and wireline industry. Additionally, the Company has significant media assets, real estate holdings and a professional sports team. The wireless and wireline segment are the main contributors to the revenues for BCE.

Healthy ARPU

The average revenue per user (ARPU) has been increasing year over year for BCE, indicative of higher LTE usage and healthy growth in subscribers. The Company is focusing on increasing ARPU by concentrating on expansion and retention of their subscriber base and by creating products & services to add value. In FY16, BCE reported ARPU of $65.46, which was ~4% higher than the FY15 level. Additionally, the ARPU for 1Q17 came in at $65.66.

Future synergies with MTS acquisition

The acquisition of MTS provides BCE with a wider broadband scale and operational synergies worth approximately $100 million, which are higher than the original estimate of $50 million. With this acquisition, BCE becomes the Number One wireless provider in Manitoba. MTS adds ~700k wireless, Internet and IPTV subscribers in Manitoba. With MTS, BCE will cover 11.2 million of Canada’s 15.4 million total households.

Attractive dividend yield and EPS

BCE Inc. provides investors with an attractive dividend yield, which is higher than its competitors. The current dividend yield of the Company is 4.7%, compared to the peer average of 3.5%. We expect BCE to maintain its dividend payout in the future. Furthermore, BCE has a handsome earning per share of $3.3 as compared to the peer average of $0.2.

Healthy free cash flow

The Company has a healthy free cash flow to support its ongoing infrastructure investments and give out dividends to the investors. BCE posted a YoY growth of 17% in its Free Cash Flow to $489 million in 1Q17. Management has increased the FCF guidance for FY17 from 3%-7% to 5%-10%, which bodes well for investors.

Investment for future growth

BCE Inc. has been consistently investing to maintain its market leadership position. The Company plans to expand its LTE Advanced coverage to reach ~87% of the Canadian population by end FY17. Bell’s LTE-A network is first in North America to deliver Quad Band (4CCA) speeds. BCE has announced future roll-out of FTTP to 1.1M locations across City of Montréal. Over 40% of all premises in the province of Québec should be overlaid with fiber by YE2017.

Recent Financial Performance

BCE reported strong 1Q17 results, with revenue growing 2.2% to reach $5.4 billion. EBITDA margin came in at 41.1%, which was relatively flat on a YoY basis. Net earnings came in 4.4% lower at $725 million on the back of acquisition costs related to MTS. Its Wireless segment was best performing, with revenues surging 7.1% YoY driven by strong ARPU and healthy postpaid subscriber growth. Wireline segment saw a 0.7% YoY growth despite significant competition and regulatory pressures. The EBITDA from wireline segment expanded 0.2 pts at 42.3%, higher than the industry. Media segment did well for the quarter, with revenues inching up 1.3% although EBITDA took a 7.6% hit due to CRTC’s decision to ban simultaneous substitution for the Super Bowl, which resulted in an estimated loss of around $11 million. The adjusted EPS came in 2.4% higher at $0.87 in the quarter.

Peer Comparison

BCE has a TTM EBITDA margin of 40.5% compared to industry peer average of 32.4%. The expected forward EPS for BCE is $3.5, higher than the industry average of $0.6. The Company’s forward EV/EBITDA of 8.9x is higher than the peer average 7.6x, which is not alarming given the strong fundamentals of BCE. Investors could buy BCE on dips and accumulate at current levels for long-term value creation.

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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