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Does BCE Stock Deserve a Place in Your High-Yield Portfolio?

Canadian communications concern BCE Inc. (BCE) posted robust revenue growth driven by its plans to increase its capacity and rising demand for higher-speed services. However, given that the company is facing high inflationary pressures and rising costs, would it be wise to add the stock to one’s high-yield portfolio? Let's discuss.

BCE Inc. (BCE) in Verdun, Canada, is the largest communication firm in Canada, offering modern Bell broadband wireless, Internet, TV, media, and corporate communications services. It operates through three segments: Bell Wireless; Bell Wireline; and Bell Media.

While BCE's four-year average dividend yield is 5.1%, its current dividend translates to a 5.4% yield. It declared a $0.72 per share quarterly dividend on May 05, 2022, to be paid on July 15, 2022. The stock has gained 12.1% in price over the past year and 3.4% year-to-date to close yesterday's trading session at $53.79.

However, the stock is down 5.8% over the past month, due mostly to a broader market downtrend. In addition, Chief financial officer Glen LeBlanc said the company is witnessing inflationary pressures–with gasoline prices alone likely to be roughly $15 million to $20 million this year–but is still finding cost savings with wireline operational expenses. The company is also experiencing pandemic and supply chain difficulties, including a 28.6% reduction in product revenues due to a shortage of equipment availability in its wireline business division.

Here is what could shape BCE's performance in the near term:

Mixed Profitability

BCE's 12.11% trailing-12-months net income margin is 122.2% higher than the 5.5% industry average. Its $6.33 billion trailing-12-months cash from operations is 2134.2% higher than the $283.45 million industry average. However, its trailing-12-months gross profit margin of 43% is 15.5% lower than the 50.9% industry average. Also, its trailing-12-months levered FCF margin and asset turnover ratio are 79.6% and 22.1% lower than their respective industry averages.

Stretched Valuation

In terms of forward non-GAAP P/E, the stock is currently trading at 20.63x, which is 11.3% higher than the 18.54x industry average. Also, its 3.97x forward EV/Sales is 85.7% higher than the 2.14x industry average. Furthermore, BCE's 2,56x forward Price/Sales is 72.2% higher than the 1.49x industry average.

Price Target Indicate Potential Downside

The 12-month median price target of CAD68.57 indicates a 0.68% potential downside. The price targets range from a low of CAD63.00 to a high of CAD72.00.

POWR Ratings Reflect Uncertainty

BCE has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BCE has a D grade for Value and a C for Quality. It is higher than the industry valuation is in sync with the Value grade. The company's mixed profitability is consistent with the Quality grade.

Among the 47 stocks in the A-rated Telecom – Foreign industry, BCE is ranked #42.

Beyond what I have stated above, you can view BCE ratings for Growth, Momentum, Stability, and Sentiment here.

Bottom Line

While BCE is investing extensively in infrastructure to accommodate increased data needs as consumers migrate to 5G and fiber networks, rising inflating and surging costs could be concerning for the company's near-term prospects. Furthermore, based on the consensus price target, we believe investors should wait before scooping its shares.

How Does BCE Inc. (BCE) Stack Up Against its Peers?

While BCE has an overall C rating, one might want to consider its industry peers, Telekom Austria AG (TKAGY), KT Corporation (KT), and MTN Group Limited (MTNOY) which have an overall A (Strong Buy) rating.

BCE shares were trading at $53.76 per share on Friday morning, down $0.03 (-0.06%). Year-to-date, BCE has gained 4.67%, versus a -13.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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