'Something for all our stakeholders'

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Another dividend increase is good, but old, news for BCE Inc. investors. Now it's the company's workers who have some reason to cheer.

The Montreal-based phone giant said yesterday it will pump $500-million into its under-funded pension plan. The news was part of a three-pronged announcement that also included a 7-per-cent dividend hike, the third this year, and a $500-million share buyback.

In doing so, it joins another of Canada's old-line companies: Canadian Pacific Railway Ltd. said earlier this month it will pump $500-million into its plan.

Make no mistake: BCE sold the pension payment on its immediate merits to shareholders. The company will get a cash benefit of $135-million in taxes, because the voluntary contribution is fully deductible. BCE will then save $75-million in annual cash payments to the pension fund. Cash flow, net income and earnings per share will all benefit going forward, starting next year.

George Cope, president and chief executive officer of BCE, said that the pension contribution, and the desire to get it done in this tax year, drove the dividend news. The announcement "gives a clarity on the use of capital," Mr. Cope said, because BCE feared "people may have assumed we weren't in the position to do the buyback or have some dividend increases."

Still, noted chief financial officer Siim Vanaselja, "today's announcement has something for all our stakeholders."

BCE, like many companies still maintaining a defined-benefit pension plan, suffered from 2008's market carnage. The company's pension plan lost $2.6-billion of its $14.8-billion in assets in 2008. A plan that was roughly 95-per-cent funded quickly became a plan 85-per-cent funded, with a deficit exceeding $2-billion, according to figures in the company's annual financial statements.

And just like other pension plan sponsors, BCE has benefited from the market rebound this year. Mr. Vanaselja said yesterday that BCE's pension plan - a mix of roughly 55-per-cent equities and 45-per-cent bonds at the beginning of 2009 - has returned 15 per cent year-to-date.

Combined with the $500-million injection, Mr. Vanaselja said, its pension plan deficit should drop to $1.3-billion, making it 90-per-cent funded.

Analysts at credit ratings agency DBRS Ltd. said yesterday that, "combined with a higher interest rate environment in the future, this should help Bell Canada make considerable progress in reducing or possibly eliminating its pension deficit."

In the meantime, investors can focus on what they're getting: The 7-per-cent dividend boost brings the annual payment to $1.74 per year, up from $1.62. It takes effect with the dividend payable April 15 of next year.

UBS analyst Phillip Huang said that, based on Wednesday's close, BCE stock was trading at a 6.1-per-cent dividend yield, but with the increase the yield jumped to 6.6 per cent.

"If we assume the yield would trend back down to the 6.1-per-cent level, it implies the shares will appreciate back to its recent high of [approximately]$28.50 over time," Mr. Huang said. "We continue to believe the company's balance sheet is strong and the dividend payout is sustainable into the long term."

Thanks to the decision to put $500-million into the pension, the company cut its estimates of 2009 free cash flow to a range of $1.25-billion to $1.4-billion, down from August guidance of $1.75-billion to $1.9-billion.

For the first nine months of 2009, BCE has posted just over $3.9-billion in operating cash flow, down about 4 per cent from the prior year. During the same period, the company spent about $2.1-billion on capital expenditures, up about 6.6 per cent.

BCE considers a handful of other measures before arriving at their definition of free cash flow, an indication of what it's able to distribute to shareholders. In the first three quarters of 2009, BCE had $1.44-billion in free cash flow, up from $1.04-billion in the similar period of 2008. Its cash dividends in the first three quarters totalled just $891-million, however, giving BCE room to push the dividend up.

BCE Inc. (BCE)

Close: $27.30, up 92¢

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By the numbers

3

Number of dividend hikes

by BCE this year

$1.74

Annual dividend due per share, up from $1.63

6.3

Indicated percentage yield on BCE shares, based on yesterday's closing price

34.3

Total percentage return on BCE shares over the last year

10.35

Current price-to-earnings ratio