BCE Inc. (TSX: BCE) is a Canada-based Integrated Telecommunications Services company. The company is Canada's largest communications company, providing advanced broadband, wireless, TV, Internet, and business communications services. The company's wireless segment provides voice, data, and other communication services, while the Wireline segment provides access to internet and IPTV along with local and long-distance telephone services. The media segment provides streaming services, conventional TV, radio broadcasting and digital media services.

Revenue Contribution

Source: Annual Report (FY19)

Investment Rationale

• BCE is a Cash Cow: The group is a friend of income investors and has a tendency to increase the dividend. Majority of 2020 was affected by the COVID-19 pandemic, and most of the companies have reduced or curtailed their dividend distribution. However, BCE not only distributed the dividend, but it also increased the distribution, which is encouraging for income-seeking investors. On February 4, 2021, the board has announced a 5.1%, or CAD 0.17 per share, increase in the annual common share dividend to CAD 3.50. This reflects a healthy financial position and stronger free cash flow generation ability of the company and concern towards the shareholders regardless of the business cycle.

• A High Yielding Consistent Dividend Payer: Regardless of the economic cycle and industrial trend, BCE has consistently paid a dividend to its shareholders over the past 10-years. Also, its shares are yielding higher on the exchange, with a dividend yield of ~6.3%, which is significantly higher given the lower interest rate environment led by the flow of cheap money in the market from central banks. Also, BCE’s dividend is approximately 2x of the TSX Composite median dividend yield of 3.35%.

10-Years Dividend History. Source: Refinitiv (Thomson Reuters)

• Capital Investment Acceleration: In the fourth quarter results, the company unveiled an ambitious broadband network acceleration program enabled by an additional CAD 1 billion to CAD 1.2 billion in capital investment over the next 2 years, to roll out its fast fibre, rural Wireless Home Internet (WHI) and 5G networks to more Canadians. The group plans to increase the number of new locations covered with fibre and WHI by as many as 900,000 in 2021 – bringing the combined footprint to up to 6.9 million homes and businesses by the end of the year – while doubling the population coverage of Canada’s fastest 5G network.

• Positive Guidance for 2021: The company reported positive guidance for 2021, as they are expecting a revenue growth between 2%-5% against a revenue decline of 3.8% reported in 2020. Adjusted EBITDA is expected to grow between 2%-5% against a 4% slump in 2020. Adjusted EPS is expected to grow between 1% to 6% against a plunge of 12.7% reported in 2020.

• 5G Network Continues to Rapidly Expand: Bell’s 5G network continues to rapidly expand and is Canada’s fastest. Bell provide download speeds up to 1.7 Gbps. Their footprint will continue to grow into 2021 and beyond as true stand-alone 5G networks are deployed using mid-band 3500 MHz spectrum. However, these are still early days and the full benefits of 5G technology would not be realized until more spectrum and new applications become available. Further, current 5G device users consuming 2x more data with ~20% higher monthly recurring revenue.

• Risk Associated to Investment: The company is exposed to a variety of risks, including credit risk, interest rate risk, forex risk, intense competition, and legal risk. Any delay in 5G implementation might affect the performance.

Financial Highlights: Q3FY20 (Figures in CAD)

Source: Company Filing 

• BCE operating revenue in Q4 was CAD 6,102 million, down 2.8% compared to Q4 2019, as COVID-19 continued to impact consumer and commercial activity, including wireless product sales and roaming volumes, media advertising demand and business customer spending. Service revenue declined 2.8% to CAD 5,090 million and product revenue by 2.7% to CAD 1,012 million.
• For full-year 2020, BCE operating revenue decreased 3.8% to CAD 22,883 million, with year-over-year declines of 3.6% in service revenue and 5.5% in product revenue.
• Further, the company achieved approximately 96% of 2019 service revenue and adjusted EBITDA in 2020 and sequential quarterly improvement in Q4 despite ongoing COVID-19 impacts.
• Adjusted EBITDA down 3.2% in Q4 driven by 2.8% lower revenue and 2.6% reduction in operating costs.
• The group recorded 92,928 total wireless postpaid net additions in Q4; postpaid mobile phone net additions was 86,590, up 27% year over year.
• Retail Internet net additions increased 25% to 44,512 with 12% Internet revenue growth. The group also reported 21,106 IPTV net additions.
• The group reported over 6 million combined direct fibre and rural Wireless Home Internet locations at the end of 2020 and is expected to grow to 6.9 million in 2021 with an enhanced capital plan as Canada’s fastest 5G network doubles population coverage.
• The group has a strong financial position with CAD 3.8 billion of available liquidity at the end of 2020.
• BCE cash flows from operating activities in Q4 were CAD 1,631 million, down 22.0% from Q4 2019, reflecting lower adjusted EBITDA, higher income taxes paid due to the timing of instalment payments, and a reduction in cash from working capital driven mainly by growth in accounts receivable from increased consumer activity, including a higher volume of wireless equipment instalment plan sales, and the timing of supplier payments.
• For full-year 2020, BCE cash flows from operating activities totalled CAD 7,754 million, down 2.6% compared to 2019.
• Free cash flow was down 89.5% in Q4 to CAD 92 million, compared to CAD 874 million the year before, due to lower cash flows from operating activities, excluding cash from discontinued operations and acquisition and other costs paid, as well as higher capital expenditures. For full-year 2020, BCE free cash flow decreased by 10.4% to CAD 3,348 million.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 20.60% of the total shareholding. RBC Wealth Management, International is the entity holding maximum shares in the company at 3.62%. Capital Research Global Investors is the second-largest shareholder, with a holding of 3.10%. The institutional ownership in the company stood at 51.02%, and strategic ownership stood at 0.07% respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation: In every successive quarter since COVID-19 began, Bell has delivered a sequential quarterly improvement in its operating results, underscoring the stability and resiliency of the company and the strength of its financial position.

As the company enter 2021, the business fundamentals are sound, and competitive position remains strong. Further, the company is poised to succeed with a rock-solid financial foundation driving both their unparalleled national investment strategy and BCE’s higher common share dividend. Also, the company has achieved approximately 96% of 2019 service revenue and adjusted EBITDA in 2020 and sequential quarterly improvement in Q4 despite ongoing COVID-19 impacts.

Moreover, the company has a strong financial position with CAD 3.8 billion of available liquidity at the end of 2020. The group also guided for a decent improvement in financial metrics in 2021. We expect increased focus and investments in broadband and 5G infrastructure would help the group in delivering improved performance in the coming quarters.

Also, BCE’s shares stood well from income investor’s standpoint, with 6.3% yield and consistent track record of dividend payment over the past 20-year regardless of the economic cycle. 

Therefore, based on strong fundamentals, improved financials on a sequential-quarter basis, expanding 5G network and valuation, we have given a “Buy” recommendation at the closing price of CAD 55.57 on February 08, 2021. We have taken the NTM Industry Median (Telecommunication Industry) EV/Sale multiple as a target multiple for valuation purpose.

1-Year Price Chart (as on February 08^th, 2021). Source: Refinitiv (Thomson Reuters).

*Recommendation is valid at February 9, 2021 price as well.

Disclaimer

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