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Key Takeaways on BCE Stock
- High interest rates are driving dividend investors away
- The Big 3 are keeping an eye on new entrant Quebecor
- BCE Stock is trading at a 12% discount to Morningstar's fair value estimate
Ruth Saldanha: Inflation has been coming down, but for Canadians, one of our major expenses continues to be cell phones and internet. The Big Three internet providers, Bell (BCE), Rogers (RCI.B) and Telus (T) control a majority of the market in Canada, and their stocks are steady dividend payers too. Yet, all three are cheap.
Why Are Canadian Teleco Stocks So Cheap?
Morningstar analyst Matthew Dolgin suspects that the reason for this is a combination of issues, including:
- High interest rates – as investors who were attracted to these stocks for their high dividends could possibly get better rates other high yield instruments,
- The entrance of Quebecor as a national wireless competitor, and
- General fear of a recession or economic slowdown.
He adds that right now, telecom is just out of favor. While U.S. telco stocks have been worse, Canadian telcos are better companies and better situated right. And one of best is Bell, a leader in providing wireless service throughout Canada, along with a formidable media business.
Why is BCE Stock So Cheap?
Bell is the biggest Canadian broadband provider, with over 4 million high-speed internet customers at the end of 2022 and a footprint that reaches 75% of the nation’s population. Dolgin thinks Bell is second to none in Canadian wireless and expects it to remain a leader, even as new entrant Quebecor could undercut incumbents on price, which in turn would limit BCE’s ability to grow average revenue per user.
Bell has been investing heavily over the past several years to upgrade its wireline network with fiber. In the time since, the firm has been outperforming competitors in adding new broadband subscribers, but we think the firm has more runway to take share over its footprint. For now, Bell stock is trading at a 12% discount to our fair value estimate.
For Morningstar, I’m Ruth Saldanha
BCE Stock Bulls Say
- The immense network improvement resulting from BCE's fiber-to-the-home buildout will lead to further wireline share gains and margin improvement.
- The Canadian government’s goal of significantly increasing immigration should prompt high levels of subscriber growth for all wireless incumbents.
- BCE’s free cash generation should rise significantly and stay elevated as it has now passed the bulk of the capital spending associated with its FTTH network overhaul.
BCE Stock Bears Say
- A combined Quebecor and Freedom Mobile should make for a strong fourth national wireless competitor, and it will likely undercut the Big Three on price, limiting pricing power and pressuring margins.
- Regulators' preference for competition and presence in the industry will keep a lid on incumbents' profits and business potential, and BCE is a leader in both wireless and wireline.
- Landline phone and linear video services are both in secular decline. With more exposure to those services than any peer, BCE’s top-line growth may lag peers’.
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