Stock of the week: BCE Inc.Stock of the week: BCE Inc.
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We regularly consider BCE Inc. (TSX-BCE, $30.11) as one of our best
buys for income. With the recent improvement in the dividend to $1.46
a share, the stock yields an attractive 4.7 per cent.
More important, BCE now plans to raise its dividend in line with the
growth in its operating earnings per share. Indeed, the directors have
raised the target payout ratio from 70 to 75 per cent. (The payout
ratio, of course, is the percentage of earnings the company pays in
dividends to its shareholders).
As president and chief executive officer Michael Sabia puts it, "The
Board's new distribution policy announced today [Dec. 12} ensures that
as our earnings grow, shareholders can be confident they will share in
our progress with a growing dividend", That is, no more 'BCE
Syndrome', with BCE squandering the shareholders' money on financial
adventures. In fact, the change in focus is reflected by the
replacement of the name BCE Inc. with Bell Inc.
BCE forecasts that its 2007 earnings per share (excluding one-time
items) will grow by four to seven per cent - from $1.93 a share this
year to $2.04 a share next year. This looks reasonable, given the
steps the company is taking to raise its earnings.
First, BCE's product mix is improving. That is, it's generating more
revenue from growth services such as wireless, high-speed Internet,
video and information and communications technology. In fact, the
company expects to generate 60 per cent of its total revenue from
growth services by the end of the year. Even better, the profit
margins of these growth services are increasing. This is likely to
continue, with three-quarters of new capital spending directed towards
strategic priorities such as its wireless operations and its
residential broadband network.
At the same time, BCE says it has seen a stabilization in the erosion
of its traditional network access lines. It's also likely that it will
be free to set its own rates without special permission. That's
because Federal Industry Minister Maxime Bernier favors a more market-
based approach to regulation.
Second, BCE continues to reduce its costs. In 2007, for instance, it
expects to cut $450 million from its costs. The company writes, "cost
discipline remains a centerpiece of the company's strategy". Lower
costs, after all, increase profits, all else being equal. BCE is also
proud of its better operating efficiency.
Third, BCE will face "no significant federal cash taxes through 2010".
The fact is, the company didn't need a tax shield by converting into a
trust. Now it has formally dropped its plans to convert.
Buy BCE Inc. for growing dividends as well as high current income and
long-term gains.