Rising interest rates weigh on BCE shares

BCE’s shares tend to act very much like a bond. As interest rates rise, the price of the shares tends to fall to compensate new investors with a higher yield. Despite this, the company’s first-quarter results met expectations and its fundamentals remain sound. Buy for growth and income.

BCE_SharesRising interest rates continue to act as a headwind for interest-sensitive stocks in the utility and telecommunications sectors. Since the beginning of the year, the S&P/TSX Utilities index is down 8.3 per cent, while the telecom index is not far behind with a loss of 6.4 per cent.

Shares of BCE Inc. (TSX—BCE), though, have suffered even worse, declining 10.6 per cent year to date. This decline has occurred even though the company’s first-quarter results largely met expectations and its fundamentals are positive. During the quarter, it added about 102,000 net new postpaid wireless, internet and internet-protocol TV (IPTV) customers.

BCE is Canada’s largest communications services stock, providing residential, business and wholesale customers with a wide range of solutions for their communications needs. The company’s results are reported in three segments.

Bell Wireless provides wireless voice and data communications products and services. Bell Wireline provides data, local telephone, long distance, as well as other communications products and services. Finally, Bell Media provides conventional, specialty and pay TV, digital media, radio broadcasting and out-of-home advertising services.

For the three months ended March 31, 2018, BCE made $719 million (adjusted), or $0.80 a share, compared with $703 million, or $0.80 a share, in the same period of 2017.

BCE’s EBITDA growth drivers

The increase in earnings reflected a 4.1-per-cent increase in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), as growing revenues more than offset an increase in operating costs. The EBITDA increase was caused by growth in the wireless and wireline segments. Specifically, higher wireless, Internet and IPTV revenues, the contribution from the acquisition of Manitoba Telecom in 2017 and continued cost containment were the drivers of EBITDA growth.

The wireless segment contributed the most to revenue growth, increasing 10.1 per cent to $1.9 billion, as service revenues rose 6.1 per cent and product revenues were up 26.9 per cent.

14th dividend increase in less than a decade

Earlier in the quarter, BCE approved a 5.2-per-cent increase in the quarterly dividend to $0.755 a share. This was the fourteenth increase since the fourth quarter of 2008, representing a 107-per-cent overall increase.

BCE, then, is a reliable dividend grower. But the company’s shares tend to act very much like a bond. As interest rates rise, the price of the shares tends to fall to compensate new investors with a higher yield. From that standpoint, there’s no hurry to buy the shares aggressively since interest rates have probably not yet peaked.

But if you’re willing to buy the stock gradually over time, and you don’t mind near-term fluctuations in its price, BCE, with its free-cash-flow generating capacity, is still a good investment for growing income over time and some long-term capital appreciation. The company’s fundamentals remain solid within a competitive industry, thanks to its wireless leadership and momentum in wireline caused by its steadily growing fibre-to-the-home profile.

This is an edited version of an article that was originally published for subscribers in the July 6, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.