Scotia Upgrade to $66.00 ahead of earningsEvent Long-term bond yields remain at very low levels by historic standards, which has valuation implications for BCE and the other high yielding telco stocks.
Impact: SLIGHTLY POSITIVE
We are making some valuation adjustments today, so that our analysis later this week can be focused on both the Q2/21 results (unchanged estimates are in Exhibit 3) and any ensuing forecast changes (BCE reports pre-market on August 5). Recall that higher spectrum costs had already been factored into our analysis last week (see industry note here: LINK). In Exhibits 1-2, we show the spread between dividend yields and bond yields (GoC 10-year yield) over both five- and 10-year time horizons.
Our focus in this note is on BCE, but we have also included the same charts for TELUS for perspective. For the past few years, our target price for BCE has been based on a 50/50 split of EV/EBITDA multiples and a dividend yield spread analysis. We are maintaining that approach today, but we have decided to use the longer-term 10-year average spread (previously we were using the five-year average) in the 50% of our target value that gets derived from our dividend and interest rate forecasts.
As you can see in Exhibit 2, BCE's dividend yield over the past 10 years has on average been 308bps above the GoC 10-year yield. So we are now taking that spread and adding it to our oneyear estimate for the GoC 10-year yield, and then we divide our annualized dividend estimate for BCE 12 months from now ($3.68, or up 5% from the current dividend) into that in order to derive a 12-month value of $75.31.
Our EV/EBITDA target value (which has also been adjusted slightly today based on new interest rate assumptions – see page two for more detail) is now $55.97, based on 8.8x 2022E wireless EBITDA and 7.8x 2022E wireline EBITDA. TD Investment Conclusion The net impact of our changes today is an increase in our 12-month target price to $66.00 (rounded average of $75.31 and $55.97) from $63.00, and we maintain our BUY rating. We will revisit our target price and return following quarterly results later this week.