John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
A few years ago, my friend Glenn announced that he was cancelling his TV service and buying a rooftop antenna. Fed up with rising monthly bills, he was thrilled to be getting all of his TV over-the-air, free.
But after cutting the cord, he's now reconnecting it.
"We are going back to Bell TV," Glenn told me. He and his wife missed certain shows they couldn't get with their antenna. But a bigger factor was the irresistible deal Bell offered them: home phone, faster unlimited Internet and 130 HD TV channels – all for $23 a month less than he was paying for phone and Internet alone.
As much as some people love to bash Bell Canada, the subsidiary of BCE Inc. knows what buttons to push to win back consumers' affection – even if the goodwill may be only temporary. In Glenn's case, the price of his bundle is set to rise sharply when the promotion expires two years from now, but he'll try to renegotiate before then.
As a BCE customer myself, I'm also well acquainted with the rising bills, expiring promotions and impossible-to-decipher monthly statements that are the hallmarks of Canada's largest communications company. But I'm also a BCE shareholder – both personally and in my Strategy Lab model dividend portfolio – which means I benefit from whatever BCE does to keep its revenue, earnings and dividends growing.
As an investor, I've certainly had no reason to complain.
Since the inception of my Strategy Lab portfolio in September, 2012, BCE has been one of my top-performing stocks. BCE's total return – assuming all dividends had been reinvested – was 62.6 per cent, or 14.6 per cent on an annual basis. That crushes the S&P/TSX composite's annual total return, also including dividends, of about 5.5 per cent over the same period.
What's more, BCE – which currently yields an attractive 4.6 per cent – has raised its dividend four times since the model portfolio's inception, including a 5-per-cent increase announced in February. And I believe there's more where that came from.
Even as BCE's land-line phone operations continue to shrink, the company is more than making up for the lost revenue with its wireless, Fibe TV, Internet and media businesses. As consumers chew through growing amounts of data at home and on smartphones, "we expect earnings to grow at a steady pace, supporting annual dividend increases," Odlum Brown analyst Cory O'Krainetz said in a recent note.
Mr. O'Krainetz has a "buy" rating and one-year target price of $61 on the shares, which closed Tuesday at $59.51, up 27 cents. His target price represents a price-to-earnings multiple of about 17 times 2017 estimates. While that's slightly higher than BCE's average P/E of the past 10 years, "we think the valuation is very reasonable in the context of today's exceptionally low interest rates," he said. (The flip side is that BCE's valuation could fall if interest rates rise.) BCE's recent results would appear to warrant a premium valuation. In the fourth quarter, the company exhibited strength across most of its businesses, adding a net 74,000 TV subscribers, 39,000 Internet customers and an industry-leading 91,000 new contract wireless users. Other analysts say the stock, which has gained about 11 per cent year to date, is already fully valued. Edward Jones analyst David Heger rates BCE a "hold" because "we feel that the share price now reflects the company's opportunity for earnings growth, thus reducing the potential for shares to outperform the overall market."
Longer term, Mr. Heger still sees plenty of positives. In addition to solid wireless gains, BCE is benefiting from expansion of its fibre-optic network, which is driving growth of its residential TV and Internet subscriber base, he said.
My friend Glenn is proof of that. But as happy as he is with the discount Bell offered him, he knows the company has ways of giving with one hand and taking with the other. "I'll be watching my bills like a hawk," he said.