Fabrice Taylor is a chartered financial analyst.
BCE Inc. seems a lot less worried than investors about the telecom sector, raising its dividend and volunteering to finance pension costs. What is the company thinking? Hasn't it heard of Globalive?
A better question might be what are investors thinking. BCE shares yield more than 6 per cent. Ten-year government bonds yield half that. If you include earnings, not only dividends, BCE shares "yield" more than 9 per cent. Are they really so risky as to deserve that kind of premium? Research In Motion, in my view much riskier, yields 7.5 per cent (on earnings) and pays no dividend. I know, I know: RIM's earnings are growing more quickly - at least for now. Who knows what's going to happen in that hypercompetitive industry? BCE's earnings are far easier to predict and, in my view, Bell has a moat around its business, RIM does not.
BCE's earnings don't rise much, but rise they do. From 2006 to 2008, revenues were basically flat but earnings before interest, taxes, depreciation and amortization were up 3 per cent. That's not much, granted. It's hard to lose a million highly profitable land lines - more than 10 per cent of your total - and watch your profits surge.
But things are getting better. RBC Dominion Securities estimates BCE profit at $2.47 per share this year and $2.63 in 2011.
Again, not exactly jaw-dropping but more reliable than potash or copper or technology earnings.
Investors liked BCE's move yesterday, and for good reason. It suggests that earnings might be higher next year than consensus. The deductible pension payment saves $135-million in taxes.
And, all together, these moves add to free cash flow and earnings per share when all is said and done.
The psychological signs are probably more important. The board, and management, are obviously confident that the company will be able to compete and contend just fine.
And investors should be happy because BCE is breaking with history and putting cash to good uses instead of squandering it, as it did for so many decades. This is BCE's second buyback announcement and third dividend increase since privatization plans fell apart last year.
And there's probably more to come - modest gains, yes, but safe gains, and I stress safe. Investors have been fretting about competition in telecoms for the past decade. The worry waxes and wanes, but it's always there. Analysts slice and dice the numbers to make the case for or against investment, but it's usually not a particularly convincing case.
I think the analysis is simpler. First, the amount of money we spend on telecommunications is going up. Look at your cellphone bill. Look at your Internet bill, your cable bill. You like high-definition TV? You'll pay for it. Long-distance calling is basically free now if you know how to get it, but so what? Bell's cash flow still goes up.
The telecom business as a whole is growing and while new entrants are always a threat, they don't exactly grow on trees. It's not easy to break into the business.
I've met Globalive CEO Tony Lacavera and talked with him about his plans. He struck me as a bright guy with a plan. He has deep-pocketed backers too. But believe me, he's not in this to lower your cellphone bill. He's in this to make money. He sees Bell's and Rogers' and Telus's fat mobility profit margins and he wants some.
And he'll get some, but not with a raging price war. He can't afford that. Will pricing suffer? It will have to, a little, but that's hardly a secret. It's priced in.
Will incumbent margins suffer? Yes, a little, but that's priced in too. What might not be is the extent to which phone companies can find ways to save money, cutting costs, sharing infrastructure and so on. They already are.
BCE has not done well compared with the stock market over the past five years. The market has a 24-percentage-point advantage over that period. But if you look only at the return from dividends, BCE has been a better investment. Dividends are far less volatile than capital gains (i.e. the price of a stock) and that has made BCE a safer bet.
That's not likely to change moving forward. Lower returns, less risk. There's room for that in a portfolio.