BCE is an expensive stock: Greg Newman

Canadian telecom giant BCE (BCE Stock Quote, Chart, News TSX:BCE) is now a victim of its own success, according to Greg Newman of Scotia Wealth Management, who thinks investors looking for stock appreciation in the telco field should be looking at other names.

For a normally slow-developing dividend name, BCE has been on an out-and-out tear this year, climbing 20 per cent since January 1. That’s better than Big Three competitors Telus, with 12 per cent gains and Rogers at a loss of almost ten per cent.

Part of BCE’s excellent run could be attributed to its lag in performance last year which bounced it higher when the sector turned more favourable, but a lot has to do with BCE playing to its strengths, says Newman, portfolio manager and director of wealth management at Scotia Wealth, who spoke to BNN Bloomberg on Wednesday.

“I think that the stock price is reflecting the fact that they just had a really healthy quarter,” says Newman. “They’re bucking the trend of wireless pressure by going to unlimited [data], which we’ve seen with Rogers. They’re overpowering with strong volumes and lower costs, and we model decent free cash per share growth at five per cent dividend growth, which is really nice.”

“The bad news is that it’s trading pretty high. It’s about 17.3x [earnings] versus Rogers which is around 14.6x. Their earnings growth is pretty anemic, growing at about 2.5 per cent even though its free cash flow is better at about five,” Newman says.

BCE flexed its muscle with its third quarter results delivered in late October, which featured adjusted EBITDA growth of 5.6 per cent to $2.59 billion on revenue that climbed 1.8 per cent to $5.98 billion. While the Q3 earnings were in line with consensus expectations, the top line was a tick above the Street’s $5.97 billion.

BCE saw its wireless net additions grow by 204,000, up 14.8 per cent from a year earlier, and total wireless, retail internet and IPTV net customer adds up 8.4 per cent to 293,950.

“With exceptional execution by the Bell team in Q3, we achieved industry-leading subscriber growth – including record Q3 net wireless customer additions – improved customer satisfaction and a strong financial performance,” said George Cope, President and CEO, in a press release. “This includes our 56th consecutive quarter of increased year-over-year adjusted EBITDA and continued strong growth in the free cash flow that fuels our network investment and shareholder value objectives.”

Just as important was the overall conclusion that BCE had managed the switch to unlimited data for wireless customers somewhat more adeptly than Rogers, which missed earnings and revenue estimates with its October quarterly report and saw management lower guidance for the full fiscal year. Rogers said it lost money on the conversion through foregoing the lucrative overage charges in favour of growing its subscription numbers.

Newman says that with little room for more growth from BCE, investors may want to try another telecom name such as Quebecor or Telus.

“[BCE] is a yield proxy, so if interest rates ever do start to go up, it would be pressured,” says Newman. “I think it’s fine here but I don’t think that it’s going to do the heavy lifting for your portfolio. This is a name that all things being equal I would like to buy at a lower level.”

“As an alternative, I would go with Quebecor or Shaw where I think you’ll get a better bang for your buck right now,” he says.