BCE Downgraded to Neutral

We are downgrading our recommendation for BCE Inc. (BCE), Canada’s incumbent telecom carrier, to Neutral from Outperform on increased concerns about the entrance of additional wireless carriers. Currently, the stock has a Zacks #3 Rank (Hold). BCE Inc. is 100% subsidiary of Bell Canada.

The second quarter earnings of BCE Inc. surpassed the Zacks Consensus Estimate and the year-ago quarter on strong TV and wireless growth. Consolidated revenue increased 3.3% year over year on higher revenues from Bell Wireless and Bell Wireline, partially offset by lower revenues at Bell Aliant.

Bell Canada continues to invest in service programs and broadband network expansion. Although the Wireline business segment faces stiff competition from cable companies and other alternative service providers, it continues to perform in line with the market expectations as strength in data and video services as well as stability in recurring business accounts offset weakness from the local consumer voice phone and long-distance segments. Increased investments in broadband in 2010 for the deployment of the high-speed fiber-to-the-home (FTTH) network will facilitate the roll-out of a broad range of new services.

Going forward, expanded handset penetration (supported by iPhones) coupled with wireless network advancement is expected to boost operating results from the carrier’s wireless business. BCE Inc. remains committed to returning maximum value to its investors through increased dividend payouts and share repurchases.

The company recently raised its annual dividend by 5% to C$1.83 per share from C$1.74 per share. This is the second time that Bell Canada raised its dividend in the current year. At the beginning of the year, the company had increased its dividend by 7% to C$1.74. BCE Inc. is committed to a dividend policy with a dividend payout target of 65%–75% of adjusted earnings per share in 2010. The dividend is covered by free cash flow.

However, BCE Inc. operates in an environment crowded with new wireless carriers. Bell Canada competes against two other national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI) in the Canadian wireless market. Further, Bell Canada continues to experience declines in ARPU (average revenue per user), the lowest among the three national carriers, largely due to decreasing voice and roaming usage as a result of a weakening Canadian economy. Hence, we are currently maintaining a cautious stance on BCE Inc.

BCE INC (BCE): Free Stock Analysis Report

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