Is BCE still a buy at these levels?

The stock has travelled a long way over the past year but has Canadian telco BCE Inc (BCE Stock Quote, Charts, News, Analysts, Financials TSX:BCE) come too far? Portfolio manager Barry Schwartz weighs in, saying he prefers Telus over BCE and Rogers.

“Depending on if they’re more growth or more more dividend seeking, our clients own shares of Charter Communications in the US as well as BCE and Telus,” said Schwartz, chief investment officer at Baskin Wealth Management, who spoke on BNN Bloomberg on Tuesday. “We used to own Rogers but we decided that we weren’t pleased with the management and they’ve had issues since. Rogers stock got up to the mid-$70s and now it’s pulled back, obviously, with concerns about the breaking of the [Shaw] deal.

The drama continues regarding the proposed merger between Canadian telecom companies Rogers Communications and Shaw Communications, where federal regulators are now looking to block the $26-billion deal which would see Canada’s two largest cable companies join forces, even as Rogers considers selling Freedom Mobile, Shaw’s wireless business in order to satisfy competition concerns. News broke this week that the Competition Bureau has filed an application to block Rogers’ acquisition of Shaw on grounds that it would lead to higher prices and poorer service for Canadians. 

The revelation has put into doubt a deal now more than a year out from its announcement in March, 2021, which many saw as likely to pass and one which Rogers appears to be dead set on closing. Rogers had put a “best efforts” clause into the terms of the deal, meaning that if regulators propose certain conditions on the completion of the merger, Rogers must do whatever is necessary to get the job done. This, reportedly, was put in place in order to beat back another suitor for Shaw, namely, BCE, which had its own designs on Shaw as a way to boost its Western Canadian business.

Now, however, BCE may be more content to sit on the sidelines now, as the two companies have fared quite differently over the past 12 months. Where Rogers has endured a nasty boardroom battle and new the installation of a new CEO at the top, BCE and Bell have watched their share rice climb 16 per cent over the past year compared to just five per cent for Rogers. Over the past month, BCE is down six per cent versus Rogers’ negative 12 per cent.

The general uptick in telecom stocks over the past year has been seen as a broader market move into more defensive sectors like utilities where earnings are steady and dividends are more prominent. Schwartz said for names like BCE, those share price gains have their downside for investors now looking to buy.

“People are crowding into safe haven names — no one’s going to cancel their cell phone contract and no one’s going to cancel their internet, so these companies are doing well in this environment,” said Schwartz. “But the valuations are also at multi-year levels and you’re not buying companies with huge growth opportunities.”

“And, unfortunately to say right now, BCE’s and Telus’ dividends aren’t necessarily being covered today. They will be hopefully in the next year or so as free cash flow starts to grow and earnings start to grow. So, that’s the function of the markets right now,” he said.

“We’re bullish on telco companies. I actually prefer Telus to BCE. I just think it’s a much better run company. And there are a bunch of interesting assets there and I like the certainty of its dividend growth. So, that would be my preferred pick,” Schwartz said.

BCE came out with first quarter earnings last week that beat analysts’ estimates with adjusted EPS of $0.89 per share, up 14 per cent year-over-year and besting the Street’s forecast of $0.80 per share. The company said growth in its wireless division led the way, while management also maintained its guidance for between one and five per cent revenue growth for the year and between two and seven per cent EPS growth.

“We delivered our best quarterly organic wireless service revenue growth rate in 11 years through balancing the right market share growth with operating profitability. In addition, our net retail Internet and IPTV subscribers activations are up 20 per cent over last year. With our historic capital expenditure acceleration program now in its second year, we will continue to bring direct fibre connections and 5G to more locations across our footprint throughout 2022,” said President and CEO Mirko Bibic in a press release.

First quarter operating revenues were up 2.5 per cent from a year earlier to $5.850 billion, while adjusted EBITDA was up 6.4 per cent to $2.584 billion. The company is still spending heavily on its rollout of fibre and wireless 5G networks, showing Capex of $952 million for the quarter, although the number was down from $1.012 billion a year ago.