Dear client:

BCE continues to invest heavily in its networks. Those improvements have helped the company attract more high-speed Internet customers. They’ve also helped BCE add more wireless subscribers as an increasing number of Canadian households give up their landlines.

The company’s upcoming $3.9 billion acquisition of Manitoba Telecom will further expand BCE’s wireless business as well as its geographic reach and earnings. That should give the company more room to keep raising its dividend.

BCE INC. $58 (Toronto symbol BCE; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 870.7 million; Market cap: $50.5 billion; Price-to-sales ratio: 2.3; Dividend yield: 4.9%; TSINetwork Rating: Above Average; www.bce.ca) is Canada’s largest telephone provider, with 6.3 million customers in Ontario, Quebec and the Atlantic provinces. It also has 3.5 million high-speed Internet users and 2.7 million TV subscribers. In all, these operations supplied 55% of BCE’s revenue in 2016.

Another important business for the company is wireless services (33% of revenue). BCE serves 8.5 million cellphone users across Canada.

The remaining 12% of revenue comes from the company’s Bell Media division; it owns CTV Television (30 stations), 30 specialty channels (including TSN, Discovery, Comedy and Space), four pay-TV services (including the Movie Network and HBO Canada) and 105 radio stations. The business also operates CraveTV, an on-demand video-streaming service with over 1 million subscribers.

In the past few years, BCE has invested heavily to improve the speed and reliability of its wireless and Internet networks. Those upgrades have helped it attract new customers as more people give up their traditional landline phones.

As a result, the company’s revenue rose 8.7%, from $20.0 billion in 2012 to $21.7 billion in 2016. Overall earnings jumped 31.2%, from $2.3 billion in 2012 to $3.0 billion in 2016. Per-share profits rose at the slower rate of 16.9%, from $2.96 to $3.46, on more shares outstanding.

In 2016, BCE spent $3.8 billion to improve its systems, and will probably invest a similar amount in 2017. The company can comfortably afford the upgrades. Its 2016 cash flow was $6.6 billion, or $7.63 a share. That’s 5.9% increase over 2015.

BCE continues to expand its fibre-optic network in Ontario, Quebec and Atlantic Canada. By the end of 2017, it expects that high-speed system will reach 3.5 million of the region’s 8.4 million households and businesses.

With the improvements, BCE ended 2016 with 1.3 million subscribers to its Fibe TV service—up 13.1% from 2015.

The company also continues to expand its high-speed wireless networks. By the end of 2017, its LTE Advanced systems will cover 83% of Canada’s population, compared to 73% in 2016. Those new systems are three times faster than the company’s current 4G LTE networks.

Faster wireless has two main advantages

The improvements continue to pay off in two ways. First, the company attracted 315,311 new wireless subscribers, net of cancellations, in 2016. That’s up 18.8% from the 265,369 it added in 2015.

As well, wireless customers under long-term contracts now account for 91% of BCE cellphone users, compared to 89% in 2015. These users tend to download more data and stream more videos. That activity helped lift the company’s monthly revenue per subscriber by 3.8% for 2016 compared to 2015.

BCE’s sound balance sheet will let it continue to invest in its businesses. As of December 31, 2016, its long-term debt was $16.6 billion, or a manageable 33% of the company’s market cap. BCE also held cash of $853 million. The company now expects its earnings will rise slightly in 2017, to between $3.42 and $3.52 a share. The stock trades at 16.7 times the midpoint of that range.

The small earnings gain is partly due to new broadcast regulations that let cable and satellite providers show the annual NFL Super Bowl football championship game with U.S. commercials. That has hurt demand for Canadian advertising space during BCE’s broadcast of the game.

Manitoba Telecom purchase almost complete

The company’s 2017 earnings outlook excludes any contribution from BCE’s planned acquisition of MANITOBA TELECOM SERVICES INC. $38 (Toronto symbol MBT; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 74.2 million; Market cap: $2.8 billion; Price-to-sales ratio: 2.8; Dividend suspended; TSINetwork Rating: Average; www.mts.ca). That utility has 1.3 million telephone and wireless customers in Manitoba.

BCE has offered $40.00 a share for the business. Under the terms of the deal, Manitoba Tel shareholders can choose either $40 in cash or 0.6756 shares of BCE for every MBT share they hold. The total value of the offer is $3.9 billion, including Manitoba Telecom’s debt of $800 million. BCE expects to complete the takeover by March 31, 2017.

To help secure regulatory approval, BCE has agreed to transfer one-third of Manitoba Telecom’s wireless accounts (under long-term contracts) and a third of its retail outlets to Telus Corp. (Toronto symbol T) for an undisclosed sum.

Following the purchase, BCE plans to invest $1 billion over five years to enhance Manitoba Telecom’s wireless and fibre-optic networks. That would allow it to sell its Fibe TV service in the province.

The company will also raise its dividend with the April 2017 payment by 5.1%, to $0.7175 a share from $0.6825. The new annual rate of $2.87 yields 4.9%.

More dividend hikes on the way BCE has now increased the payout 13 times since the end of 2008. It expects to raise the dividend again in 2018, even if the Manitoba Telecom purchase falls through.

BCE is a buy. Manitoba Telecom investors should tender their shares to BCE.