Yawn All the Way to the Bank With BCE Inc.

Stocks don’t get much more boring than BCE Inc. (TSX:BCE)(NYSE:BCE), which is exactly the thought process behind owning it.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

Over the years I’ve talked with many different people about their portfolios, and I’ve noticed one common theme.

The folks who stuffed their portfolios full of Canada’s best blue-chip stocks are, as a group, much happier than other groups–even the indexers.

For most people, the reasoning is two-fold. First, they like getting dividends, which are fairly easy for most blue-chip stocks to deliver. And secondly, there’s a sense of security knowing their portfolio is invested in high-quality companies. You don’t have to keep a close eye on those kinds of stocks.

Sure, it might be possible to beat the returns offered by these kinds of stocks. According to past performance, small-cap value stocks should outperform over time. But many investors don’t care, choosing to forfeit the possibility of outsized returns in exchange for security.

One stock that will allow you to sleep well at night is BCE Inc. (TSX:BCE)(NYSE:BCE). Here’s the case for making it a core holding.

Stickiness

Warren Buffett famously encourages investors to invest in companies with a moat–a sustainable competitive advantage that can’t be easily copied by some upstart new competitor.

BCE has a massive moat, of course. The company has invested billions in both its wireline and wireless networks, as well as a network of retail stores across the country. At the end of 2015 the company had 8.2 million wireless customers, 3.4 million internet subscribers, and 2.7 million cable and satellite users. It also had 6.7 million local telephone customers.

How exactly is an upstart competitor expected to take on a company that entrenched?

And then there’s the stickiness of each customer. Most people just blindly pay each month, oblivious to the other options out there. And in 2016, going without internet and wireless phone service is akin to shutting off the power or gas. People will make a lot of sacrifices before cutting out their precious data.

Growth

BCE seems to be the only telecom in Canada willing to do big acquisitions.

The company made headlines in 2014 by privatizing the portion of Bell Aliant it didn’t already own. That deal made sense, since BCE was already the majority shareholder. Nobody else was going to acquire Bell Aliant, no matter how hard they tried.

Manitoba Telecom was another story. Rumours were flying about it shopping itself for months before BCE showed up and agreed to acquire it for $40 per share. BCE’s management bid aggressively and got the deal done.

Pickings look somewhat slim going forward, but I wouldn’t doubt BCE will continue its acquiring ways. Maybe it’ll start looking at targets outside Canada.

Valuation

Yes, BCE is a little expensive, at least compared to normal. But in today’s low interest rate world, that’s to be expected. Folks will pay a bit of a premium for consistent dividend growth.

Shares currently trade hands at 19.5 times trailing earnings. The good news is, when we look at forward earnings estimates, the P/E ratio drops to 17.6, which is a little more reasonable.

That dividend

Not only does BCE have a streak of paying annual dividends that is well over a century long, the company also has a terrific history of growing the payout.

Right now the company pays $0.68 per quarter, which is good enough for a 4.4% yield. The payout ratio based on trailing earnings is 86%, but that decreases to 78% when looking at 2016’s estimated earnings. That’s a little high, but certainly not bad.

Since 2008 when the company reinstated its dividend after the whole leveraged-buyout fiasco (remember that?), it has increased the quarterly payout from $0.365 to $0.68. That’s an increase of more than 8% annually, which handily beats inflation and is probably better than the annual raise from work for most investors.

Conclusion

BCE isn’t going to perform as well as the next sexy startup. All it’s going to do is be a slow and steady performer–the workhorse of any portfolio. For most investors, this is hardly a bad thing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »