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For dividend investors, BCE expected to remain an attractive option

George Cope, president of BCE Inc., announces the proposed takeover of Astral Media Inc. in a deal worth about $3.38 billion in March 2012. For dividend investors, BCE remains an attractive and reliable option.

Paul Chiasson/The Canadian Press

For dividend investors, boring is good – which makes BCE Inc. an exemplary citizen.

The telecom and media giant kicks off earnings season for the major communications companies on Thursday and the results are likely to be sweet news for those looking for another predictable but welcome dividend increase.

To reduce the surprise factor to the minimum possible, BCE pre-announced in mid-December that it was on track to meet its 2012 guidance for both revenue growth and EBITDA, or earnings before interest, taxes, depreciation and amortization.

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The results are expected to be good enough to allow BCE to continue hiking its dividend by about 5 per cent a year. The current payment is 56.75 cents a quarter and was last raised in mid 2012 by 2.50 cents.

BCE's yield now stands at 5.1 per cent, a major attraction for investors. The lofty payout, with its strong possibility of further growth, offers a far larger return than Government of Canada 10-year bonds yielding around 2 per cent. Government bonds at such low yields are vulnerable to substantial price declines should interest rates begin rising, and don't offer the possibility, as BCE does, of rising payouts.

Still, some analysts are cautious on BCE.

Rob Goff, telecom and media analyst at Byron Capital Markets Ltd., has a "hold" rating and $45 target on the company because he sees wireless, a market with strong growth prospects, driving returns in the sector and it's an area of relative weakness for BCE.

BCE gets only about 26 per cent of its EBITDA from wireless, compared to 64 per cent at Rogers Communications Inc. and 62 per cent for Telus Corp.

Telus and Rogers are scheduled to announce next week, while Quebecor Inc. releases its results in mid-March.

The telecom industry needs wireless growth to offset the slow bleed in traditional land lines phones, estimated to be declining in Canada by about 400,000 to 500,000 subscribers annually.

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While Mr. Goff sees "attractive one-year returns" for BCE, the firm's relatively low wireless exposure is a drawback.

In a longer term outlook on the industry, Maher Yaghi at Desjardins Capital Markets told clients in a note earlier this week that he expects EBITDA growth in 2014 to be around 3 per cent, strong enough to support continued dividend growth at the large firms.

"Our preferred large cap names in the telecom and cable sector remain Telus, due to its expected industry leading earnings growth, and BCE, given its attractive dividend yield and reasonable valuation," he said.

He sees BCE providing capital gains along with dividend income, and has set a stock price target of $47.50. The company "should outperform over the next 12 months."

Mr. Yaghi puts a $72 target on Telus shares. The company's strong wireless growth profile should allow it to raise its dividend by 10 per cent a year, attracting income-seeking investors.

Turning to other industry players, Mr. Yaghi says Rogers Communications is fully priced. He's given it a $44.50 a share price target, modestly below the current market price. The company is trading at a premium multiple to its peers, so "we continue to believe there is better value elsewhere in the sector at this time."

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Québecor trades at a discount, yet has strong profit growth potential. Mr. Yaghi expects the discount to narrow over time and the shares to trade higher. His share price target is $46.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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