The Long Case for Canadian Telecom Giant BCE

I purchased BCE Inc. (BCE) at $23.01 per share on August 3. BCE is Canada’s largest telecommunications company. Its Bell Canada subsidiary accounts for 90% of revenues, providing traditional phone service, wireless service, Internet access and video services. Its Bell Globemedia subsidiary provides content to CTV television and publishes The Globe and Mail newspaper. Another subsidiary, Telesat, is in satellite communications.

BCE has approximately 891.4 million shares outstanding with a market capitalization of more than $20 billion. The company currently trades at 1.87 times stated book value, just over 14 times earnings and 1.21 times sales. It pays a dividend yield of more than 5%.

The company’s stock is down because of concerns over its declining legacy phone operations. These concerns are real, for BCE as well as virtually every other established phone company. In the case of BCE, some analysts estimate it will lose as much as 25% of its telephone customers to cable over time.

But BCE is pursuing strategic restructuring initiatives to extend its leadership position and boost the stock price.

Primarily, this means adding customers to its wireless, video and high-speed internet operations at a rate that makes up for losing residential landline customers. The company is therefore shedding jobs in its traditional phone unit and focusing on the growth businesses.

BCE is also rewarding shareholders through payouts and stock repurchases. The company increased its dividend in 2005 and may do so again. BCE announced its intention to repurchase 5% of its shares during the 12-month period ending February 2007. And, with its solid balance sheet and ample free cash flow generation, look for BCE to continue paying dividends and buying back stock.

What’s more, many analysts are bullish on BCE’s management team, including CEO Michael Sabia and Bell Canada COO George Cope. And the regulatory and competitive arena BCE faces in Canada may be more favorable than those faced by its US peers, where the battlefield is more crowded.

Risks with this pick:

* BCE’s plan to replace its traditional phone customers with wireless, video and high-speed internet services users just never materializes at the levels needed.

* Pricing competition from wireless and cable phone service [VoIP] companies erodes profits.

* An unfavorable regulatory environment develops.

* Currency fluctuations.

I'm bullish on BCE as a long-term investment. But please, do your own due diligence before buying.

BCE 1-yr chart: