This week, I finish my “Telecoms on the radar” with the analysis of BCE and Telus (TU). If you have missed last week analysis, you can check Shaw Communication and Rogers analysis too.

BCE was associated with the classic wireline phone for many years. I even remember having the “real” bell phone with roulette… This tells you how fast things evolve and how technology is pushing new products all the time.

Revenue

Revenue Graph from Ycharts

BCE has evolved into the most balanced telecom in Canada with four segments:

Source: BCE 2016 annual report

The wireline voice segment will obviously continue to decrease but internet, wireless and media divisions will continue to be growth vectors.

The company recently acquired Manitoba Telecom to increase its footprint in Western Canada. The company should be able to generate synergies from this acquisition.

How BCE fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

Source: Ycharts

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many income seeking investors’ rule: I try to avoid most companies with a dividend yield over 5%. Very few investments like this will be made in my case (you can read my case against high dividend yield here). The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly comes with dividend growth and this is what I am seeking most.

Source: data from Ycharts.

BCE has always been one of Canadian investors’ favorite dividends paying stock. I can understand why as the company maintained a yield always close to 5% without compromising its payments or the company’s growth. Even better, BCE stock price has recuperated from the 2009 crash and then provided  some interesting growth.

BCE meets my 1st investing principles.

Principle#2: Focus on Dividend Growth

Speaking of which, my second investing principle relates to dividend growth as being the most important metric of all. It proves management’s trust in the company’s future and is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything else but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?

Source: Ycharts

BCE is part of the Canadian Dividend Aristocrats list. While it dropped its payout during the 2008-2009 crash, BCE rapidly came back on the dividend growth road. The company benefits from a steady business model generating consistent cash flow.

BCE meets my 2nd investing principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what happened with a company. As investors, we are more concerned about the future than the past. this is why it is important to find companies that will be able to sustain their dividend growth.

Source: data from Ycharts.

As you can see, management has maintained a relatively high payout ratio over the past 10 years, but it has always been under control. While the distribution increased steadily since 2010, the payout didn’t move much. Management will have to remain cautious with further increases but there is still room for more dividend growth.

BCE meets my 3rd investing principle.

Principle #4: The Business Model Ensure Future Growth

BCE is the largest Canadian telecom by market cap, about twice the size of Telus. It shows the most balanced business model among this small group. BCE has shown a very solid dividend profile for several years and my analysis proves it will continue to rise in the future. All BCE services are based on some sort of monthly subscription generating a consistent base for cash flow.

BCE still shows a strong business model and meets my 4th investing principle.

Principle #5: Buy When You Have Money in Hand – At The Right Valuation

I think the perfect timing to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you have some savings put aside. There is valuation work to be done. In order to achieve this task, I will start by looking at how the stock market valued the stock over the past 10 years by looking at its PE ratio:

Source: data from Ycharts.

Since 2014, the market has been consistent with BCE valuation. I don’t think a PE near 18 comes in cheap, but there is obviously a price to pay for a premium dividend payer like BCE.

Digging deeper into this stock valuation, I will use a double stage dividend discount model. As a dividend growth investor, I’d rather see companies like big money making machine and assess their value as such.

BCE has been the highest yielding telecom for several years and certainly deserves some attention. The current stock price seems fairly valued even with a relatively high discount rate of 10%. It is kind of the best of both worlds where you can expect a 10% total return while cashing a 5% dividend yield.

Source: how to use the Dividend Discount Model

BCE meet my 5th investing principle

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found that one of the biggest investor struggles is to know when to buy and sell their holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by the fact that the company confirms or not my investment thesis. Once the reasons (my investment thesis) why I purchase shares of a company are not valid anymore, I sell and never look back.

Investment Thesis

When you have the possibility to invest in a strong yielder as BCE and still hope for a small stock appreciation growth, you must take a hold of it. BCE shows a well-diversified business model and will continue to generate strong cash flow in the future.

However, I must remind investors that BCE has US$24.1 billion in debt, which gives it a debt-to-equity ratio of about 1.62. This is not a perfect situation as interest rates are now rising.

BCE shows a solid investment thesis and meets my 6th investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements. The second part is called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

BCE is probably the best compromise for an income seeker. While it’s stock is relatively stable, shareholders enjoy a steady yield. Since payment is fairly secure, BCE falls into the “buy and sleep” stock.  This is the main reason why it is part of my Canadian portfolios.

BCE is a core holding.

Final Thoughts on BCE – Buy, Hold or Sell?

At the current valuation, BCE is still interesting for an income seeking investor. Such a company rarely trades at a bargain price. I think that if BCE is not part of your portfolio already, you should definitely consider it.