BCE is Canada’s top telecom stock, this investor says

It’s been a dud of a year for BCE (BCE Stock Quote, Chart, News, Analysts TSX:BCE) shareholders but there’s still good value in owning it going into 2021, says portfolio manager Paul Harris, who sees it as tops among Canada’s telecom stocks.

“We own BCE. We like it because I think it’s probably the best quality in the telecom space,” says Harris, partner at Harris Douglas Asset Management, who spoke on BNN Bloomberg last Thursday. “It’s got a great dividend and I think that they’ve got good stable cash flows to be able to continue to pay that dividend.”

Currently sitting at a yield of six per cent, BCE’s dividend is ahead of Telus (TSX:T) at 4.9 per cent, Rogers Communications (TSX:RCI.B) at 3.3 per cent and Shaw Communications (SJR.B) at 5.3 per cent.

None of the Canadian telcos did well in 2020, with BCE, Rogers and Shaw all likely to end the year in the red and Telus looking like it’ll finish at even. It’s a strange scenario for defensive-minded stocks like BCE et al to be in considering the extreme market volatility we’ve just been through. With the onset of the COVID-19 pandemic last winter, instead of loading up on high-yield utilities to gird against the market’s ups and downs, investors flocked to more swingy stocks in the tech sector.

That move paid off for many as the work-from-home environment brought about for many companies an increased need for tech product upgrades and infrastructure roll outs, while tech e-commerce companies profited from accelerated growth online shopping.

And while telecom companies across the board lost some business through the closure of retail outlets during lockdowns, BCE had other COVID-related troubles, as Bell Media saw lower advertising revenue particularly due to the loss of sports viewership over the spring and early summer.

“They’re coming out of this issue with COVID and there’s obviously the sports business and advertisements on the TV side that might have been hurt but I think what they have been benefitting from is more infrastructure on the telecom side,” said Harris, “which continues to be very important because of people living and working from home, etc., but on top of that, I think they’ll benefit as they roll out 5G and you see better uptake on that side.”

“If you want to stay in the telecom space, obviously, the other play is Telus, which is a very close competitor to BCE, but if you’re thinking about the telecom space I think BCE is one of the best businesses around and a very good, stable company. It’s actually well run and I think will continue to grow and do well,” Harris said.

BCE last reported earnings in early November where its third quarter numbers were down year-over-year but better than those of the second quarter at the height of the lockdowns. BCE’s Q3 operating revenue was down 2.6 per cent to $5.79 billion but up from $5.35 billion registered in the Q2. The company’s wireless business was flat year-over-year at $2.32 billion and saw 128,000 new postpaid and prepaid customer additions, down from 204,000 a year earlier. For the Q3, BCE generated earnings of $712 million or $0.79 per share compared to $812 million or $0.91 per share a year earlier. Both BCE’s top and bottom line were beats, however, with analysts having called for $5.65 billion in revenue and $0.77 per share in earnings.

President and CEO Mirko Bibic was upbeat in his outlook, even as the company declined to provide guidance going forward, referring to uncertainties related to the pandemic.

“Diligent execution by the Bell team in an improving economy, which included the re-opening of retail sales and service for wireless, Internet and TV and the return of live sports programming supporting advertising growth, resulted in significantly improved financial performance and broadband customer additions compared to Q2, with Bell welcoming 210,000 net new retail Internet, IPTV and wireless customers,” said Bibic in the third quarter press release.

Following the third quarter report, RBC Dominion Securities analyst Drew McReynolds maintained his “Sector Perform” rating on BCE and dropped his target price from $59 to $58 per share.

“We believe BCE is well positioned to be a ‘safe haven’ for investors reflecting an attractive dividend yield, a high degree of liquidity and unmatched scale within the Canadian telecom industry to absorb COVID-19 impacts,” said McReynolds, as quoted by the Globe and Mail on November 6.

“Not unlike other operators, BCE is not immune to near-term wireless ARPU pressure, a contracting business market and double-digit declines in advertising spending. Nevertheless, we believe the migration to unlimited plans/EIPs, sustained FTTH [fiber-to-the-home] investment and the realization of additional operating efficiencies that leverage a scale advantage position BCE for a “reset” in 2021E that can support continued dividend growth,” McReynolds wrote.