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BCE Inc.: A True Widows And Orphans Stock

Summary

BCE is a "Forever Stock" - a low-risk, attractively valued, dividend growth stock well positioned for continued growth.

The company is a hallmark of strong execution, which will continue to drive leading wireless ARPU and EBITDA growth in 2016 and beyond.

BCE possesses numerous strengths that promise investors superior long-term performance, including steady revenue growth, expanding profit margins, healthy cash flow from operations, and strong and stable return on equity.

As a Canadian resident, I lean towards Canadian stocks in my portfolio due to their tax-advantaged dividend stream, which means I tend to research and write articles on Canadian-based companies for Seeking Alpha. Although, given my preference for attractively valued, large- to mega-cap, dividend growth champions, the majority of stocks I own are members of the S&P/TSX 60 Index comprising 48 of the largest 60 public companies in Canada, with an average market cap of C$22.3 billion.

Of the five dozen companies in the S&P/TSX 60 index, 42 dual-list their shares on both Canadian and U.S. exchanges. These include the five biggest banks and two largest insurers, many of the miners and energy companies, both major railways, and the major telecoms - including BCE Inc. (NYSE:BCE), the sixth largest company on the Toronto Stock Exchange (TSE), with a market cap of C$52.4 billion, and the subject of this article. BCE is one of the most widely held stocks in Canada, but despite being listed on the Big Board in New York, the company does not receive much following on Seeking Alpha. Only 16,040 Seeking Alpha subscribers follow BCE, compared to 255,502 for AT&T (NYSE:T) and 170,088 for Verizon (NYSE:VZ).

A Proud History and Tradition Forms a Solid Foundation

The Bell Telephone Company of Canada (today Bell Canada) was incorporated by an act of the Canadian Parliament on April 29, 1880, receiving through its charter the right to construct telephone lines alongside all public rights-of-way in Canada - in hindsight, a most valuable privilege at the time. What is known today as BCE Inc. was created in 1983 through a corporate reorganization whereby BCE became parent to over 80 companies previously known as the Bell Group, of which Bell Canada had been head. This reorganization was designed to cast off restrictions from the original charter that inhibited certain corporate acquisitions and investments.

Today, BCE Inc. is Canada's largest telecom services company. It provides residential, business and government customers with a comprehensive and innovative suite of broadband communications and content solutions to meet all their communication needs, including wireless, high-speed Internet, Internet Protocol (IP) TV, satellite TV, business IP broadband, and information and communications technology (ICT) services.

The company's segments include Bell Wireless, Bell Wireline and Bell Media. Bell Wireless provides wireless services that are available to practically all of the Canadian population. The Bell Wireline segment includes voice and data networks, high-speed fiber solutions and Bell direct-to-home satellite television service. The Bell Media segment offers specialty and pay television, radio, digital media and out-of-home advertising. BCE is also a significant investor in the Montreal Canadiens and Maple Leaf Sports and Entertainment.

Investment Thesis

When I present the investment thesis for a company's shares, I do so from the perspective of considering these shares as proportional ownership of the underlying business. As a result, I have a long investment horizon. Long-term investing in equities is buying and holding a stock you believe will compound investor wealth indefinitely into the future.

Like Mr. Buffett, my favorite holding period is "forever." I am a shareowner, not a sharerenter. When I make an investment decision, I am not looking to hit the ball out of the park - and singles and doubles will suffice. But I do protect the plate to avoid striking out - I seek safety to avoid disasters. I define "disaster" (and "risk") in four words: "permanent loss of capital." I don't think of volatility as risk; volatility can be an opportunity if it presents the occasion to acquire incremental proportional ownership of a quality company when a bipolar Mr. Market causes it to go on sale temporarily.

To sum up my investing methodology in four compound words, it is "Long-Term, Large-Cap, Value-Oriented, Dividend Growth." This is not everyone's approach to investing in equities. If it is not your style, you're likely not reading an investment article on BCE Inc. in the first place.

Not every stock is a wonderful business. It is an exclusive list. At the top of the list is being the market leader and possessing a strong and stable management team. It encompasses qualities like a large market cap and critical mass; a durable, easy-to-understand business model; a distinguished corporate and dividend history; and an iconic brand, which leads to consumer awareness and loyalty. For me, these qualities combine to form a sleep-well-at-night stock - a "Forever Stock," as I call them.

In this vein, in 2015, BCE's operating company Bell Canada placed third overall in the rankings for Canada's most valuable brands, challenging the country's "Big Five Banks" as the only company in the top five from outside the financial services sector. Equally important, Bell's brand value is one of the fastest growing as well, increasing by 38% in the past two years.

BCE possesses numerous strengths - which promise investors superior long-term performance compared to most stocks - strengths that include its steady revenue growth, expanding profit margins, healthy cash flow from operations and strong and stable return on equity.

BCE is a low-risk, low-volatility (β of 0.22), reasonably valued, dividend growth stock currently yielding about 4.5%. The company is the overall leader in the concordant, manageable communications services sector in Canada, with its high barriers to entry. Three major Canadian telecom service providers, BCE Inc., TELUS Corporation (NYSE:TU), and Rogers Communications (NYSE:RCI), control the market in Canada. This results in relatively smooth and safe revenues and earnings for the company.

Smartphone penetration in Canada is still quite low for a developed country at about 70%; however, it is experiencing substantial growth, as smartphone ownership increased by 24% in just the past year. As the smartphone installed base grows, so too does the incumbent demand for newer replacement models. According to market research firm Catalyst, the mean number of smartphones ever owned by current owners grew almost 15% last year, from 2.1 to 2.4 devices. As the largest generational cohort in North America since the Baby Boomers, Millennials are more connected than any other generation and are playing a key role in the evolving mobile landscape, as they are driving most of the growth across smartphone activities and replacements. These sectoral characteristics add up to a long growth runway for BCE's wireless business.

Canadian Smartphone Penetration Rates, 2014-2015

(Source: Catalyst)

Under George Cope, who became CEO of BCE Inc. in 2008, in the wake of a failed C$52 billion takeover attempt by Ontario...


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