BCE Inc. $33 – Toronto symbol BCE

BCE INC. $33 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) is Canada’s largest provider of traditional telephone services, with over 12 million customers in Ontario and Quebec. It also provides Internet access (Sympatico), satellite TV (Bell ExpressVu) and wireless services (Bell Mobility).

In the past few months, the company has moved to unlock some of its value. It recently sold most of its interest in Bell Globemedia, the private company that owns The Globe and Mail and CTV Television. BCE also plans to sell a minority stake in satellite operator Telesat to the public.

In July 2006, BCE merged its rural telephone business with 53.2%-owned subsidiary Aliant Inc. into a new income trust called Bell Aliant Regional Communications Income Fund.

BCE now plans to eliminate its holding company structure, and convert its remaining operations into a trust early next year.

Each shareholder will receive one unit of the new Bell Canada Income Fund for each share held. The trust will pay an initial annual cash distribution of $2.55 a unit (7.7% yield), up from BCE’s current $1.32 dividend (4.0% yield). Investors will be liable for capital gains taxes on the conversion.

Thanks to its recent moves, BCE will soon get over half of its revenue from faster-growing businesses such as wireless. That should give it plenty of cash to fund capital spending and distributions. The company also plans to redeem all of its preferred shares, which should also help free up cash.

BCE still aims to cut its annual expenses by $2 billion. In the three months ended June 30, 2006, this plan saved it $172 million. If you exclude restructuring and other one-time items, BCE’s earnings in the latest quarter fell 6.9%, to $0.54 a share (total $482 million) from $0.58 a share ($538 million) a year earlier. (These figures include the assets transferred to Bell Aliant.) Revenue crept up to $4.8 billion from $4.76 billion.

The stock gained 5% on the Bell Canada trust announcement, and now trades at 17.4 times the $1.90 a share its should earn this year.

BCE is a buy.

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