BCE Inc.

BANK OF MONTREAL, $27.48, Toronto symbol BMO, earned $225 million in its first fiscal quarter, which ended January 31, 2009, down 11.8% from $255 million a year earlier. During the quarter, the bank issued about $1 billion of new common shares. Consequently, earnings per share fell 17%, to $0.39 from $0.47, on more shares outstanding. However, the latest quarterly earnings included a $359-million (or $0.69 a share) writedown of illiquid securities, including asset-backed commercial paper, held by the bank’s trading division. If you exclude all unusual charges, Bank of Montreal would have earned $1.09 a share. The slowing economy continues to weigh on the bank’s earnings. Loan-loss provisions rose 86.1% in the latest quarter. Most of this increase came from Bank of Montreal’s U.S. operations, particularly loans related to the commercial real estate and manufacturing industries. The U.S. accounts for about 10% of the bank’s revenue. Overall revenue in the quarter rose by 20.5%, to $2.4 billion from $2 billion. Strong gains at the bank’s personal banking operations in Canada and the U.S. offset slow growth at its corporate lending and wealth management businesses. A new high-interest savings account, the launch of the new Tax-Free Savings Account and new credit cards that provide rewards based on use helped the bank lure more customers during the quarter....

BCE INC., $26.12, Toronto symbol BCE, earned $1.8 billion in 2008, down 3.9% from $1.9 billion in 2007. Earnings per share fell 3.8%, to $2.25 from $2.34 on more shares outstanding. Revenue fell 0.3%, to $17.7 billion from $17.75 billion. These figures exclude restructuring charges, mainly job cuts, and other one-time items. The restructuring should cut BCE’s annual expenses by $400 million. BCE continues to lose traditional phone customers to cable companies and Internet-based phone services, but these losses are slowing. Meanwhile, BCE’s cellphone business is growing strongly; revenue rose 7.6% in 2008, and its subscriber base grew by 4.5%. The wireless division accounts for 25% of BCE’s revenue and 43% of its profit. Higher demand for BCE’s high-speed Internet and satellite-TV services helped offset lower revenue from its traditional phone services. Despite the lower earnings, BCE raised its quarterly dividend by 5.5%, to $0.385 a share from $0.365. The new annual rate of $1.54 yields 5.9%....

Rogers Communications, $34.45, symbol RCI.B on Toronto (Shares outstanding: 635.7 million; Market cap: $21.9 billion), is one of Canada’s largest wireless and cable providers. Rogers has 7.7 million wireless subscribers throughout Canada, and 2.3 million basic-cable subscribers in Ontario and eastern Canada. Rogers also owns assets that include the Toronto Blue Jays and Toronto’s Rogers Centre (formerly the SkyDome). The company has three segments: Wireless, which generates 54% of Rogers’ revenues, Cable (33%) and Media (13%). 1) Rogers Wireless includes the Rogers and Fido brands, which combined account for about 37% of all Canadian wireless subscribers. Wireless offers cellular voice, data and messaging services throughout Canada. It also offers mobile access to the Internet, wireless email, digital pictures and video transmissions....

CANADIAN PACIFIC RAILWAY LTD., $37.22, Toronto symbol CP, earned $631.5 million in 2008, down 6.1% from $672.8 million in 2007. Per-share earnings fell 6.0%, to $4.06 from $4.32. These figures exclude foreign-exchange losses and other one-time items. The drop was largely caused by higher fuel and labour costs. Revenue, however, rose 4.8%, to $4.9 billion from $4.7 billion as higher rates offset lower freight volumes. CP’s operating ratio rose to 78.6% from 75.3% a year earlier. (Operating ratio is calculated by dividing a company’s regular operating costs by its revenue. The lower the ratio, the better.) Falling oil prices and temporary layoffs should help lower CP’s costs in 2009. The company plans to issue up to 13.9 million new common shares at $36.75 each. The gross proceeds of $510.8 million will help CP cover its pension costs, which will rise from $95 million in 2008 to between $150 million and $195 million in 2009. In 2010, CP estimates its pension obligations will continue to climb, to between $295 million and $345 million. To conserve cash, the company plans to cut capital spending by $200 million in 2009....

BANK OF MONTREAL $32.30, Toronto symbol BMO, has agreed to buy the Canadian life insurance business of major U.S. insurer American International Group Inc. (AIG). The bank will pay $375 million, which is equal to 19% of the $2.0 billion or $3.76 a share that it earned in the fiscal year ended October 31, 2008. Bank of Montreal’s insurance operations currently supply just 2% of its total revenue, and this purchase will not significantly expand this division’s contribution. However, insurance is a future growth area. As well, Bank of Montreal probably got this business for a bargain price in light of AIG’s severe financial problems. Bank of Montreal is a buy....

BANK OF NOVA SCOTIA $33.65 (Toronto symbol BNS: Shares outstanding: 991.9 million; Market cap: $33.4 billion; SI Rating: Above average) has completed the $2.3 billion purchase of Sun Life Financial’s 37% stake in TSX-listed CI Financial Income Fund, Canada’s third-largest mutual fund company. Bank of Nova Scotia’s revenue in its fiscal year ended October 31, 2008 fell 4.9%, to $11.9 billion from $12.5 billion. Earnings per share excluding writedowns fell 3.5%, to $3.87 from $4.01. The bank still has around $690 million U.S. of exposure to asset-based commercial paper. However, even in the unlikely event that the entire portfolio became worthless, that would mean at worst a potential after-tax loss in the range of $200 million. That’s manageable, given that the bank made $315 million in the latest quarter, even after $642 million in writedowns. Bank of Nova Scotia now trades at just 9.6 next year’s forecast earnings of $3.50 a share....

TELUS CORP. (Toronto symbols T $36 and T.A $33; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 317.8 million; Market cap: $11.4 billion; SI Rating: Above average) had considered acquiring BCE before BCE accepted the offer from the Ontario Teachers’ Pension Plan. Even though the BCE privatization has failed, Telus will probably not launch a new takeover offer. That’s mainly because the credit crisis would make it difficult for Telus to borrow the cash it would need. Telus may instead try to merge its wireless operations with those of BCE into 50-50 joint venture. There is little geographic overlap between the two systems, so a partnership with BCE would probably win regulatory approval. Combining the technical and marketing operations could also lead to substantial cost savings. Lower costs would help the combined operation compete with new companies that plan to enter Canada’s wireless market in 2009. Telus is a buy. The cheaper, non-voting ‘A’ shares are the better choice.

Conservative investors have little need to dabble in risky stocks these days, since many conservative favourites are unduly cheap. BCE Inc. plunged last month after its $42.75 takeover by a private consortium fell through. That happened because BCE failed the ‘solvency test’, which was a condition of the deal. Analysis showed that, post-takeover, BCE’s tangible assets (that is, excluding goodwill or ‘value-as-a-going-concern’) would fall short of BCE’s post-takeover debt of $43 billion. This was mainly because of the plunge in stock-market values since the deal’s June, 2007 signing, near the market peak....

BCE INC. $23 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 806.2 million; Market cap: $18.5 billion; SI Rating: Above average) provides telephone service to over 7.5 million residential and business customers in Ontario and Quebec. BCE also provides wireless service to 6.4 million subscribers across Canada. In June, 2007, BCE accepted a $42.75-a-share all-cash takeover offer from a private consortium led by the Ontario Teachers’ Pension Plan. The deal required auditing firm KPMG to provide an opinion on BCE’s solvency following the takeover. KPMG’s preliminary analysis shows that BCE’s liabilities would probably exceed the value of its assets. KPMG’s report effectively killed the takeover. BCE recently stopped paying dividends on its common shares as part of deal with the consortium to help ensure that takeover would go through. Now that the deal is dead, BCE will probably resume quarterly dividend payments. The previous annual rate of $1.46 would now yield 6.3%....

We continued to recommend BCE for the past year and a half, despite the risk that its $42.75 takeover might fall through due to the developing credit crisis and bear market. That’s because, either way, we felt BCE still offered an attractive investment opportunity. Now that the possibility of a takeover (at a price anywhere near $42.75) has ended, BCE seems unduly depressed. This partly reflects dumping by traders who only held the stock because they wanted to profit from the takeover. It may also be partly due to a misunderstanding by some investors of BCE’s financial situation. Even without the likelihood of a takeover, BCE still has strong appeal. Its businesses continue to generate steady cash flows. A new restructuring plan will also give BCE more cash to invest in its high-growth operations, particularly wireless and high-speed Internet access. BCE could also unlock some of its value by spinning off or selling some of its operations....