BCE Inc.: This “Forever Asset” Now Yields 5.5%
One Stock to Own Forever
What does Colgate-Palmolive Company (NYSE:CL), Stanley Black & Decker, Inc. (NYSE:SWK), and The Procter & Gamble Co (NYSE:PG) all have in common?
In short, all three have paid out dividends for over a century. Through wars, depressions, and asset bubbles, these businesses have managed to reward their loyal shareholders for over 100 years.
How is this possible? It’s simple, actually. All three of these stocks belong to an elite category of investments that I like to call my “Forever Assets.” These firms constitute a group of stocks you can buy today and own for the rest of your life. Their businesses have created wealth, not just over weeks or years, but for generations.
When you own names like these, you no longer have to worry about inflation or bear markets. Many of these firms have paid dividends to shareholders for over a century. For this reason, some of the world’s wealthiest investors—including Bill Gates, George Soros, and Warren Buffett—hold these stocks in their portfolios.
Case in point: Canada-based BCE Inc. (NYSE:BCE), a well-run telecom company serving millions of customers. The company sends households a bill each month and you get a dividend. Those dividends, by the way, have rolled in for the past 137 years.
Obviously, such a wonderful business usually trades at a premium. But following a recent market sell-off, the yields on these shares have approached 5.5%. For investors, that presents a rare chance to scoop up the name at a discount.
BCE can trace its roots back to the 1870s, after Alexander Graham Bell invented the first telephone. In the following years, Bell and his business associates collected royalties from the lease of technology to customers. The company provided the early shoebox-shaped phones made of wood and charged a $40.00 annual rental fee.
Today, BCE provides the typical combination of phone, Internet, and satellite TV services for residential and business customers. Last year alone, these operations grossed over $21.7 billion in revenues.
Its status as a Forever Asset comes from a few key points.
The Canadian wireless market, which accounts for one-third of BCE’s revenue and profits, effectively amounts to a cozy oligopoly. The Big Three national carriers—BCE, TELUS Corporation (NYSE:TU), and Rogers Communications Inc. (NYSE:RCI)—own roughly 90% of all subscribers. This gives incumbents almost total control of the market and allows them to set prices at will.
It would be almost impossible to break into this business. New competitors have to front billions of dollars in order to build out a telecom network across the country. The Big Three already own the best wireless spectrum, so late arrivals have to make due with poorer reception. And because most Canadians have to sign long-term contracts for services, new players would have a tough time stealing market share.
For these reasons, almost all attempts by smaller players to crack this market have failed. Small regional players, such as Vidéotron in Quebec or Eastlink in Atlantic Canada, eke out a living in small pockets across the country. But in the absence of serious competition, the Big Three enjoy a comfortable market position.
BCE’s wireline business, which accounts for the other two-thirds of sales and profit, also benefits from efficient scale. Because of the small size of many Canadian cities, it doesn’t make sense to have two or more competitors providing cable and Internet services to the same households. Any new rival would only split the existing business, greatly diminishing the returns for everyone involved. This fact, in and of itself, is usually enough to keep any potential competitors at bay.
For proof of how lucrative this business is, take a glance at cell phone bills across the country. Canadians pay the most for telecom services among G7 nations, according to a recent survey by the Organisation for Economic Co-operation and Development. A follow-up report by European analyst Tefficient AB showed that Canadians paid more for mobile data than any of the 32 other wealthy countries that were surveyed. (Source: “Unlimited pushes data usage to new heights,” Tefficient, January 5, 2017.)
|Total Mobile Service Revenue Across Selected Countries ($ U.S.)|
|Country||Price Per Gigabyte|
You can see this disparity in the monthly prices for bare-bones mobile plans. In Europe, for example, an entry-level package costs as little as $14.00 in Germany, $18.00 in France, and $21.00 in the U.K. These plans usually come with hundreds of minutes, unlimited texts, and some mobile data. In some cases, these packages even come with unlimited calling across the continent and some far-flung oversea territories.
Canadians, in contrast, pay around $32.00 per month for comparable services. Some telecoms offer monthly subscriptions for less than $25.00. These plans, however, come with service levels far below the entry-level packages found in other countries. Bell’s $25.00 a month plan, for example, buys only 50 local minutes, 100 text messages, and 100 megabytes of data. (Source: “Basic Phone plans,” Bell Canada, last accessed February 26, 2018.)
For shareholders, it means that incumbents rake in the dollars hand over fist. The Canadian wireless industry earns about $0.46 in profits for every dollar generated in revenue, according to a recent report by Merrill Lynch. By comparison, profits came in about $0.43 in the U.S., $0.33 in Japan, and $0.24 in the U.K. (Source: “Alphabeatic: Canadian wireless bills still tops in world as election looms,” OpenMedia, August 4, 2015.)
North of the border, BCE has the reputation as a classic widows-and-orphans stock. In other words, it’s a conservatively managed business that pays out dependable dividends. People who need investment income have counted on this stock to pay their bills for decades. Thousands of seniors own BCE, most of them retired employees who received shares in their compensation packages.
That hasn’t always been the case. In 2008, a group of institutional investors attempted a $41.0-billion leveraged buyout of BCE. To iron out the deal, the board of directors skipped two dividend payments to shareholders. But when the deal got nixed by auditors, management resumed the distributions.
But aside from that minor blemish on its track record, BCE pays out one of the most reliable dividends around. Current profits more than cover the outgoing distributions. The business generates ample cash flow with reasonable debt and ample access to liquidity. I’d prefer to see a little more wiggle room (the payout ratio stands at 70%). But, given the stable nature of BCE’s telecom business, shareholders don’t have much to worry about.
Future dividend growth, however, will likely remain meager at best. The landline business conked out years ago. The wireless side has become mostly saturated. The firm’s fixed-line business faces challenges, both from cable cord-cutters and rivals in eastern Canada.
That said, BCE’s entrenched market position should allow the company to keep earning adequate returns on invested capital. Canada’s population continues to grow slowly, but relentlessly over time. Management should also be able to raise prices at or above the rate of inflation. We expect that these dual trends will be reflected in a long-term distribution growth rate between four and six percent annually.
That slower growth rate doesn’t make BCE at bad investment, per se. No savvy investor should think that a stock paying out a yield over five percent deserves to collect much dividend growth. Understand that you’re basically getting a stream of bond-like coupons with some built-in inflation protection. But with a yield so high, investors sitting around reinvesting their distributions will trounce the market as the years tick by. It’s a wonderful sight.
With a rock-solid dividend, I see three main risks for this income stream: declining legacy businesses, tougher rules from regulators, and new competition entering the market.
BCE’s satellite TV and landline phone businesses continue to face secular declines. Cable profits also seem to have topped out, as more consumers stream content online. But whether households watch their favorite shows on T.V. or online, they still need a cord connected to their house. So, unless Canadians decide to give up e-mail, television, and social networks, they will continue paying monthly bills to BCE.
Regulators present a much bigger threat. The Canadian government keeps pushing to foster competition in the telecom space, which can hit BCE’s earnings from time to time. For instance, in 2013, the Canadian Radio-Television and Telecommunications Commission (CRTC) capped all wireless contracts at two years, preventing carriers from locking in customers to long-term deals. More recently, the agency banned fees charged to “unlock” smartphones, a practice that carriers count on to reduce customer churn. (Source: “CRTC to ban unlocking fees for smartphones as of Dec. 1,” The Globe & Mail, June 16, 2017.)
Expect more customer-friendly moves. For example, the CRTC could mandate large carriers to offer roaming service to smaller competitors at lower prices. BCE and Telus’s network-sharing agreement allows both carriers to provide service to a wider area at a low cost (effectively two networks for the price of one), undercutting any potential rivals. In the future, the CRTC could deem this partnership as anti-competitive.
The entrance of a large, foreign telecom companies presents the biggest wildcard here. In 2013, Verizon Communications Inc. (NYSE:VZ) mulled an expansion into the Canadian market. While those plans ultimately got nixed, it sent shares of BCE plunging double-digits.
That said, the odds of a new player entering the industry remains remote. As I mentioned earlier, any rival would have to cough up billions of dollars to build out a nationwide network (a costly proposition, given the country’s sheer size and sparse population). A new competitor would also only split the existing business between the Big Three companies, greatly diminishing returns for everyone involved.
Moreover, incumbents like BCE also enjoy some protection by the government. Canadian law prohibits foreign ownership of a major telecom carrier. That effectively stonewalls any outside company from moving in and stealing market share by offering deep discounts.
The Bottom Line on BCE Inc.
Of course, my concept of “Forever Assets” amounts to a lot of common sense. Buy wonderful businesses that provide timeless products or services that pay ongoing dividends to owners. Over the long haul, you should do pretty well.
BCE constitutes a classic example. Thanks to its entrenched market position, this stock has paid out dividends for over a century. My approach: own some shares, stash the certificates in a drawer, and collect the dividends for decades to come.