Strong Income with 5G Coming For More

BCE Inc. or Bell Canada Enterprises is Canada’s largest telecommunication company. The company provides industry-leading broadband communications services to more than 22 million customers across the country. The company owns Canada’s largest network of data centres, retail outlets, as well as Bell LTE, Canada’s national network. BCE is a leading residential communications provider offering fibre-based Fibe TV and Fibe Internet, Connected Home services and home phones in seven provinces. It also provides national wireless services, and a wide range of business communications services including data hosting and cloud computing across the country. Moreover, its multimedia company, Bell Media is Canada’s premier media company hosting the No.1 sports channel TSN.

The company operates through Bell Wireline (50% of 2019 revenues), Bell Wireless (38%) and Bell Media (12%). By-products, wireline broadband & TV accounts for 36% of revenues, followed by wireless (36%), wireline voice (17%), and media (11%). Bell Canada caters to a diversified customer base which includes retail consumers, businesses and government customers. It provides an extensive range of products and solutions for all their communication needs.

Investment Data

• Opportunity Score: 68
• Ticker: TSE:BCE
• Sector: Communication Services
• Industry: Telecommunication Services
• Market Cap: 37.92B
• P/E: 20.42
• Dividend Yield: 6.00%
• Payout Ratio (Earnings): 122.43%
• Chowder Score: Members Only
• Revenue Growth: Members Only
• Dividend Growth: Members Only
• Dividend Growth Fit: 6/10
• Dividend Income Fit: 8/10

Revenue Growth & Market Exposure

BCE’s services include Bell Mobility, Virgin Mobile and Lucky Mobile wireless, high-speed Internet, IPTV, and Satellite TV, Home Phone local and long-distance, as well as IP-broadband connectivity services and business service solutions. BCE has a huge footprint with its LTE wireless coverage reaching out to 99% of the Canadian population. The company has a long track record of providing reliable wireless services. Bell’s fibre footprint covers 9.7 million homes and businesses in Ontario, Quebec, the Atlantic provinces and Manitoba. BCE is rapidly expanding its Canadian broadband fibre and wireless network infrastructure. For 140 years, consumers, businesses and communities have relied on Bell for quality networks and latest communications services. 

BCE Inc. is strategically well-positioned across all product lines and is a market leader in the Internet and TV. Growing demand for data and communication infrastructure should act as a tailwind for the company. Bell Canada’s wireless segment is a fast-growing, high margin business. The roll-out of Bell’s all-fibre internet network will ensure gigabit internet speeds, home Wi-Fi, and innovative TV services, which will support in retaining its customer base.

Each of BCE’s wireless, wireline and media segments contributed to growth in revenue and free cash flow in 2019. 2019 revenue increased by 3.6% driven by continued strong postpaid subscriber growth, a higher year-over-year prepaid revenue contribution, and increased sales of higher valued smartphones. Wireless EBITDA also grew by ~9% in 2019 along with solid gross activations and improved postpaid customer churn which drove an increase of 7.4% in total net subscriber additions to 515,000. In fiber, retail Internet and IPTV subscribers registered a growth of 5% in 2019. The company continued to advance its direct fiber and wireless home Internet footprint in the last year and reached 5.1 million homes and businesses.

BCE also achieved strong subscriber and ABPU numbers in the last quarter. The company successfully continues to bag exclusive deals in Canada and became the marketing partner of the upstart video platform Quibi in Canada. Bell Media also has CRTC approval for the V network deal and is closer to ensuring the long-term viability of V at a critical moment for the broadcasting industry. The deal will add diversity in news and entertainment for Quebec.

Bell Canada will be focusing on expanding its all-fibre connections, providing access to smaller communities with its wireless home Internet and build on 4G LTE lead by launching the next generation of wireless with mobile 5G in 2020. The company will continue to strengthen its networks. It is looking forward to driving both revenue and market share growth on the back of its strong network advantage.

Bell Canada is competitively positioned to deliver faster and efficient 5G across Canada, with its wireline infrastructure already deployed at 88% of its cell sites, network sharing arrangement and 30 megahertz of 3.5 gig flexible use spectrum. Bell is ready to deliver initial 5G service in urban centres across Canada as next-generation smartphones become available. Nokia, with more than 60 commercial 5G contracts with wireless carriers worldwide, is BCE’s 5G partner.

The company had guided consolidated revenue growth of 1% to 3% for 2020, reflecting healthy wireless subscriber growth, Internet and TV market share gains and a favourable media outlook. However, with the outbreak of the COVID-19, BCE is focusing on securing its networks and business operations, implementing alternative work arrangements and closing retail shops. The company has said that the COVID-19 situation could have a material impact on its operations and financial results.

Dividends

Bell Canada is a Dividend Aristocrat raising its dividends by more than 100% over the last nine years. It currently sports a dividend yield of 5.8%. The company has a solid history of giving high returns to shareholders. It last raised its dividend by more than 5% representing the 12th consecutive year of 5% increase. The company has maintained a dividend growth of 15% CAGR in the last decade. The company has announced a dividend increase of 5%, within a targeted payout ratio of 65% to 75%, for 2020 supported by free cash flow growth underpinned by its capital spending and cost discipline. It generated a 7% higher free cash flow in 2019.

BCE’s wireless business generates approximately 50% of its cash flow and is growing at a fast pace across Canada. BCE’s strong wireless and residential wireline operations and market-leading media assets generate strong and reliable cash flow. The company generates large free cash flows to maintain both capital investment and shareholder returns. Ownership of Canada’s most advanced fibre and wireless networks is BCE’s biggest advantage. Telecom and communications business is highly capital-intensive in nature. Scale and high subscriber acquisition costs act as strong entry barriers for newcomers. BCE should continue to increase its dividend streak, driven by a growth in wireless subscriber base and an expanding direct fibre service footprint.

Bell Canada is targeting continued deployment of fibre, utilization of new technologies and incremental service improvement, to deliver operational efficiencies and productivity gains across the organization. The company has the appropriate assets to lead the next wave of communications innovation in Canada driven by a growing demand for rapid connections and the unlimited service potential of 5G, IoT, and artificial intelligence. It also has access to CAD2.6 billion of liquidity along with stable investment-grade credit ratings and its leverage ratio is projected to remain relatively stable year-over-year. Free cash flow is expected to grow by 3%-7% in 2020. The cash after dividend payments will be deployed towards repayment of short-term debt and financing of strategic investments such as wireless spectrum auction purchases.

Competition

Bell Canada commands approximately a 30% share of the Canadian telecom market. However, the company faces competition from the likes of Rogers Communications and Telus as well as new entrant Shaw Communications.

Rogers Communications is the second largest telecom company in Canada with Telus following closely behind. Other smaller competitors include Shaw Communications and Cogeco Cable Inc. Shaw is amongst the large providers of residential communication services in Canada. Cogeco provides cable TV, telephone, and Internet to customers in Ontario, Quebec, and some parts of the US.

The competition is fierce and the wireless providers use bundles to entice customers and lean on their fast internet delivery to home to entice bundling multiple packages. Most of the providers offer 2-year contracts and customers flock between companies based on the savings. Retention is a key challenge the companies have to deal with.

Bottom Line

BCE has been growing its internet and IPTV net subscriber base year-on-year, while at the same time making investments in rolling out Canada’s next-generation communications infrastructure. Bell Canada’s continuous investment in wireless technologies and solutions further safeguards the company from the threat of a decline in the wireline business. The company is taking several steps in order to capture broadband market share and internet revenue by making the fastest Internet speeds available to consumers across Canada and also to many of the country’s underserved communities. Healthy EBITDA growth contributes significantly to higher year-over-year free cash flow generation which should support a growing dividend stream in the coming years. 

Communication and a high-quality internet are extremely important in the ongoing lockdown period. Most likely, BCE’s products and services should continue to be in high demand. BCE could be a good investment for long-term investors and can be one of the companies that can make up your portfolio, having fallen to levels not seen in years.