BCE has problems but it’s still a cash machine

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Shares in BCE Inc are well down from their early February high of $60.20 as investors try to digest the financial implications of the new CRTC rules on wireless contracts and cable TV packages, including the "pick-and-pay" option.

The company, which owns 15 per cent of The Globe and Mail, has also been forced to deal with a number of other distractions including a court challenge of a CRTC ruling on the pricing of Bell's mobile television app and the resignation of the head of Bell Media, Kevin Crull. That came amid a firestorm of criticism after he attempted to interfere with CTV (owned by Bell Media) in its coverage of CRTC decisions. Mr. Crull publicly apologized for the incident, but it wasn't enough to save his job. BCE is also involved in another dispute with the CRTC over Super Bowl advertising.

Despite all this, the company continues to be a cash machine. Year-end results showed 2014 net earnings came in at $2.36-billion ($2.98 per share), up from $1.975-billion ($2.55 per share) the year before. The improvement on a per share basis was 16.9 per cent. Stripping out one-time items, adjusted earnings per share grew from $2.99 to $3.18 (6.5 per cent).

Operating revenue for the year was up 3.5 per cent to $18.7 billion while free cash flow increased to $2.7 billion ($3.46 per share) from $2.6 billion ($3.41 per share) the year prior.

"Financially, we enjoyed a successful 2014, comfortably achieving all our financial guidance targets for the year," said CFO Siim Vanaselja. "While the communications industry is marked by intense competition and dynamic change, we have leveraged our business model to produce results consistently at or above expectations.

"Going into 2015, BCE's operating momentum and financial foundation is strong. Our financial targets for this year reflect our expectation for continued strong Wireless segment profitability, positive growth in Wireline segment performance, as well as healthy earnings and free cash flow growth from operations to support our substantial capital investment in strategic network infrastructure and a higher BCE common share dividend for 2015."

BCE announced a dividend increase of 5.3 per cent to $0.65 per quarter ($2.60 a year). The first payment at the new rate was made on April 15. The company's policy is to pay out between 65 per cent and 75 per cent of free cash flow as dividends. Based on the recent price of $53.79, the stock yields 4.8 per cent.

Looking ahead, the company projected revenue growth of between 1 per cent and 3 per cent for 2015 with a big jump in free cash flow of between 8 per cent and 15 per cent. If achieved, that would suggest a hefty dividend increase in 2016. Adjusted earnings per share are expected to come in between $3.28 and $3.38.

I consider BCE to be a buy for excellent cash flow and modest growth potential. Talk to a financial adviser before making a decision.