Why I think Bell Canada (BCE) is not worth your money
The stock is clearly overvalued at this juncture
A Little Background
BCE is both a wireless and internet service provider, offering wireless, broadband, television, and landline phone services in Canada.
It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market.
It is also the ILEC (incumbent local exchange carrier--the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces--Ontario and Quebec.
Additionally, BCE has a media segment, which holds television, radio, and digital media assets.
BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz.
In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remaining 7%.
With that brief background info behind us, lets cut to the chase and look at some hardcore numbers.
Stagnant Sales
BCE has not been able to grow its sales much in the last 5 years. Revenue has grown at a CAGR of barely 0.9%
This tells me that the company is finding it really hard to attract more customers.
Feeble Operating and Net Income
BCE has not been able to increase it operating income either. In fact the operating income has de-grown by 0.1% in the last 5 years.
This is mainly because of the fixed operating expenses it has to incur regardless of any customer growth. The operating expenses have actually grown at 2.5% annually in the last 5 years.
Net income has witnessed a similar sorry affair, with its current TTM net income being almost the same as 5 years ago.
Depressed EPS
Due to no growth in its net income, BCE has seen it Earnings per share (EPS) go down by 0.4% in the last 5 years.
Consequently, the PE ratio has increased from 18 to 20.
Burgeoning Debt
While the revenues and income have seen virtually no growth, the debt has continuously inched upwards.
As of today, BCE’s net debt stands at $297 Billion. 5 years ago this figure was at $227 Billion. That’s an increase of roughly 6% per year.
Deplorable Cash Flows
BCE’s cash flows have also been hit hard in the last 5 years.
Cash flow from operations have grown at merely 1.5%, while free cash flow has gone down by over 23% annually since 2017.
Unsustainable Dividends
If you are banking on BCE’s dividends, think again.
With a current dividend payout ratio of 114%, BCE is definitely stretching its balance sheet to keep the stockholders happy.
But it won’t be able to sustain this for long, given its low dividend coverage ratio of 0.9x.
Net debt / EBITDA has increased from 2.4 to 2.9 since 2017, indicating that BCE would have to cut back on its dividend sooner or later to avoid the risk of taking on too much debt.
I recently published an article on my top 4 ratios to analyze dividend stocks:
The current dividend yield of 5.7% and dividend growth of 11% seems to be funded by the growth in debt.
Bottomline
BCE has been a favorite pick of many Canadian dividend investors in the last decade or so.
However, it has not been able to grow its sales and income meaningfully in the last several years. And the debt on its balance sheet has been piling up all along.
If BCE is unable to bring in more customers to increase it revenue or cut some costs to increase those profits, the days of 100% payout and 10% dividend growth are numbered.
It would be wise if Canadian dividend investors take a pause and re-evaluate BCE’s viability as a good long term dividend stock.
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Disclaimer: Please do not consider this post as an investment advice. I am not a registered financial advisor. Nothing in this article should be construed as an investment advice. Please consult a registered financial advisor before making any investment decisions.
Credits: Most of the content of this article is public information that can be found on news articles, government and company websites.