BCE INC. $27 - Toronto symbol BCE

BCE INC. $27 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 767.2 million; Market cap: $20.7 billion; Price-to-sales ratio: 1.2; SI Rating: Above Average) has 7.2 million residential and business telephone customers in Ontario and Quebec. It also has 6.6 million wireless subscribers across Canada, and sells other services, including Internet access and satellite TV. BCE also owns 44% of Bell Aliant, which has 3.1 million telephone customers in Atlantic Canada and rural parts of Ontario and Quebec. Bell Aliant transferred most of its wireless business to BCE as part of the deal that created the trust in 2006. Last year, BCE began a major cost-cutting program in response to a high-profile takeover bid by a private group headed by the Ontario Teachers’ Pension Plan. The takeover failed, but the restructuring, which includes cutting jobs, relocating employees and selling surplus real estate, should lower BCE’s annual costs by $400 million, starting next year. These savings will help it compete with cable companies, as well as up to three new wireless carriers that should start up next year. If you exclude restructuring costs and other unusual items, BCE earned $447 million in the three months ended June 30, 2009. That’s up 5.2% from $425 million a year earlier. Its per-share earnings rose 9.4%, to $0.58 from $0.53, on fewer outstanding shares. Revenue fell 2.1%, to $4.3 billion from $4.4 billion. The company continues to lose residential phone customers, but these losses are slowing. As well, its wireless business is attracting fewer customers because of the recession. BCE’s $10.6-billion long-term debt seems high, at 53% of its market cap. But the company’s traditional phone business still generates steady cash flow. BCE may use some of this to pay down debt. It also holds cash of $1.8 billion, or $2.30 a share. The company should earn $2.38 a share in 2009, and the stock trades at 11.3 times that estimate. BCE recently increased its dividend for the second time since the start of 2009. The new rate of $1.62 yields 6.0%. The company aims to pay out 65% to 75% of its earnings as dividends. The current payout rate is at the lower end of this range, so further increases seem likely. BCE is a buy.