BCE still looks good, this portfolio manager says

Looking for a smart place to park your money? John O’Connell thinks investors won’t be disappointed with Canadian telecom giant BCE (BCE Stock Quote, Chart, News, Analysis, Financials TSX:BCE) and its attractive dividend. 

“BCE I think has done an excellent job at putting all the pieces back together again when it was mandated that Bell Canada be broken up many years ago, which is interesting historically in terms of what’s going on in other parts of the world these days with regard to anti-competition theory,” said O’Connell, CEO and chairman of Davis Rea, who spoke on BNN Bloomberg on Tuesday.

“I think BCE’s dividend is safe and secure for the time being. It’s not really a growth business and it’s a protected industry in Canada, in a sense, so it’s safe as long as the government continues to allow a relatively small number of players to operate,” O’Connell said.

BCE declared a quarterly dividend of $0.875 per share, payable on October 15, with its second quarter 2021 report, delivered last week. BCE’s yield currently tracks at a hefty 5.5 per cent, which must sit well with shareholders who have watched the stock climb steadily in recent months. 

Like the other Canadian telco’s, BCE had a lacklustre 2020 but have picked it up this year. BCE is currently up 17 per cent for 2021 and is now pretty well back to its pre-COVID highs around $64.

BCE saw revenue grow by 6.4 per cent year-over-year to $5.698 billion for its Q2 2021, while adjusted EBITDA climbed 31.1 per cent to $751 million and adjusted EPS was up 32 per cent to $0.83 per share. Net earnings grew by a big 150 per cent to $734 million, one year after the COVID-impacted second quarter of 2020. Analysts had called for $5.76 billion in revenue and $0.78 per share in adjusted earnings.

Bell added 44,433 net new postpaid mobile-phone customers and 1,814 prepaid customers over the quarter, along with 17,680 net new retail internet subscribers, down from 19,023 a year ago.

“A year after COVID-19’s initial impacts in early 2020, we’ve achieved strong, sequential improvement in total customer net additions; increased consolidated revenue and adjusted EBITDA more than six per cent, with leading growth in wireless service revenue and ABPU; and further accelerated capital spending to drive the next-generation networks and service innovations critical to Canada’s recovery and long-term economic growth,” said Mirko Bibic, President and CEO, in an August 5 press release. 

“Canadians are continuing to embrace the power of our next-generation networks like 5G and Bell pure fibre, reflected in a 12 per cent increase in residential Internet revenue; a 75 per cent increase in total retail Internet, IPTV, and mobile phone and connected device net subscriber additions; and the ongoing introduction of exclusive digital media platform and service innovations,” he said.

The company said it was on track with its previously announced guidance, calling for two to five per cent revenue growth for 2021 and two to five per cent growth in adjusted EBITDA. Management called its financial position strong, pointing to $5.3 billion of available liquidity which will allow for an acceleration of its capital investments.

Bell’s advertising revenue has picked up with the return of sports and original TV programming and contributions from French-language network Noovo, with the company reporting a 65 per cent rise in ad sales. At the same time, the company said Bell Wireless product and roaming revenues continue to see impacts from the pandemic and its travel-related restrictions.

And while Canada’s Big Three telecoms — BCE, Telus and Rogers — seem to have rebounded well from last year’s challenges, O’Connell thinks there will be a bit of a reckoning down the road, at least when it comes to user fees which remain higher than most on a global scale.

“In Canada, we pay unseemly high rates for data and cellular services, and the excuse is that it costs a lot of money to build new technologies,” O’Connell said. “I think the Canadian telecommunications industry deserves to be congratulated for making those types of investments, but I do think that Canadians are paying a fairly heavy price for it.”

“What will be interesting to see is as places like [SpaceX’s Starlink] increasingly use low Earth orbit satellites to offer services to the rural areas of Canada — which have always been used as an excuse for charging high rates so that the cities are somewhat subsidizing the more rural areas of the country — how much does that effectively begin to weaken the argument for a protective industry in Canada?” he said.

“At that point, which may be two or three years away, I think the risk/reward scenario shifts more towards the risk side of the equation, but I don’t think we’re there yet,” O’Connell said. “But it’s not a fast growth business and it’s very, very capital intensive.”