BCE: More Fiber, Dividends, And Customers (NYSE:BCE)

U.S. investors looking for diversification overseas don’t have to look far, as our neighbor to the north is host to a large number of well-run companies with a similar operating structure, and dividend payment frequency as their U.S. counterparts.

This brings me to the Canadian telecom juggernaut, BCE Inc. (NYSE:BCE), which relatively low priced compared to its trading range over the past year. As shown below, BCE is still trading in the bottom half of its 52-week price range, while yielding close to 6%. This article highlights why income investors looking for diversification from a well-regarded telecom should give BCE a hard look.

Why BCE?

BCE is Canada’s largest communications company, sitting ahead of Rogers Communications (RCI) and Shaw Communications (SJR). It was formed 39 years ago, through the integration of Bell Canada, Northern Telecom, and other related subsidiaries.

What sets BCE apart from its peers is that it also has a premier media arm beyond its traditional broadband internet/TV, wireless, and wireline businesses. This includes Canada’s top media channels CTV, V, TSN, and RDS. Additionally, BCE also licenses premium American content: HBO, Showtime, and Starz for its Canadian audience.

BCE has given its investors good reasons to cheer for, as wireless revenue grew by 7% YoY, driven by subscriber growth and rising ARPU (average revenue per user), which rose by 2%, as more users moved to higher-end plans and high levels of roaming activity as consumer travel has roared back.

Also encouraging, BCE is realizing its long-term vision of fiber to the home, with the highest retail internet net activations in 17 years, up 33% YoY to 85K net subscriber growth, driving a robust 8% residential internet revenue growth. The company is also well on track with its plans, as it targets 80% of broadband Internet buildout by the end of this year.

It’s worth noting, however, that adjusted EBITDA grew by a more modest 1.2%, due primarily to the impact of Hurricane Fiona, which made landfall in Eastern Quebec, and was the biggest storm to hit Canada anywhere in its history. Moreover, inflationary pressures resulted in higher costs and pressured margins.

Notwithstanding near term headwinds, BCE remains a long-term growth story due to its mid-term broadband Internet build out plan, targeting 10 million residential customers, which is a big population size for Canada, and 60% addressable market coverage for its 5G network. Momentum around this buildout was highlighted by management during the recent conference call:

Both PCMag and Ookla recognized Bell’s 5G mobile network as Canada’s fastest in their latest reports. Such third-party recognition reinforces Bell’s network leadership and the value of our unprecedented generational investments, which will continue to drive socioeconomic benefits to Canadians, while supporting substantial free cash flow generation for years to come for our investors.

By the end of the year, 5 million homes will qualify for symmetrical speeds of at least 3 gigabits. That is the broadest multi gig broadband footprint anywhere in North America. And in September, we announced an agreement to purchase internet reseller distributor. This acquisition will further strengthen our competitive position and support Bell’s Internet growth strategy particularly in the value segments of the residential and SMB markets.

Meanwhile, BCE maintains a strong BBB+ rated balance sheet. Management is also focused on shareholder returns, having repurchased $187 million worth of shares over the trailing 12 months, and averaging ~$200 million worth of share repurchases over each of the past 2 completed years. Its dividend was also raised by 5% earlier this year, and appears to be safe, with a 41% dividend to operating cash flow ratio over the past 12 months.

Lastly, I find BCE to be reasonably attractive at its current EV/EBITDA of 11x. While this doesn’t appear to be cheap by historical standards, this has more to do with one-time charges that it took with respect to Hurricane Fiona, and the valuation ratio would likely trend toward the 10x range without this impact. As such, I see potential for at least a 10% share price appreciation to a normal valuation, which equates to a potential mid-teen total return including the dividend.

Investor Takeaway

BCE is a solid long-term growth play due to its mid-term broadband Internet build out plan, 5G network expansion, ongoing share repurchase program, and its high dividend. The company remains well-positioned to capitalize on the demand for high-speed Internet, and investors who take a long-term view could be rewarded with meaningful upside. As such, I find BCE to be a solid choice for reliable income and potentially sound long-term returns.