BCE INC. $41 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 774.0 million; Market cap: $31.7 billion; Price-to-sales ratio: 1.6; Dividend yield: 5.3%; TSINetwork Rating: Above Average; www.bce.ca) is
Canada’s largest provider of telephone services.

BCE’s main subsidiary, Bell Canada, has 6.1 million telephone customers in Ontario and Quebec, as well as 2.1 million high-speed Internet customers and 2.1 million TV subscribers. Bell Canada supplied 53% of BCE’s 2011 revenue.

The company’s wireless business now has 7.4 million subscribers across Canada. This division accounted for 27% of BCE’s 2011 revenue.

In addition, BCE owns 45% of regional phone company Bell Aliant (see page 34). This investment supplied 13% of its 2011 revenue. The remaining 7% comes from its Bell Media division, which owns the CTV Television Network (28 TV stations), 30 specialty channels and 33 radio stations.

In the wake of an unsuccessful takeover bid from the Ontario Teachers’ Pension Plan in 2008, BCE turned its focus to cutting costs. Its restructuring mainly involved layoffs and selling surplus real estate. That freed up cash for BCE to invest in its growing wireless and Internet businesses.

Revenue fell from $17.8 billion in 2007 to $17.7 billion in 2008. However, revenue turned around in 2009, and rose 10.2%, to $19.5 billion, in 2011.

BCE’s earnings fell 3.9%, from $1.9 billion, or $2.34 a share, in 2007 to $1.8 billion, or $2.25 a share, in 2008. Thanks to the savings from its restructuring, earnings jumped 33.3%, to $2.4 billion, in 2011. BCE also used some of these savings to buy back shares. Because of fewer shares outstanding, earnings per share rose 39.1%, to $3.13, in 2011.

Quality content gives BCE an edge

The company’s strong earnings are also helping it expand its media business. For example, in April 2011, BCE paid $3.2 billion for the 85% of CTVglobemedia that it did not already own. (CTVglobemedia is the private company that owns the CTV Television Network, specialty channels, radio stations and 15% of The Globe and Mail newspaper.)

Owning all of CTV will help BCE compete with cable companies, which have expanded their broadcasting operations over the past few years. It also puts the company in a better position to negotiate better access to programming.

Moreover, BCE can use content from CTV to attract new wireless customers. For example, it recently started selling certain TV shows for viewing on mobile devices.

BCE has also teamed up with Rogers Communications Inc. (Toronto symbol RCI.B) to buy 75% of Maple Leaf Sports and Entertainment (MLSE), the private company that owns several professional sports teams, including the Toronto Maple Leafs (hockey), Toronto Raptors (basketball) and Toronto FC (soccer). MLSE also owns the Air Canada Centre arena in downtown Toronto, as well as specialty TV channels such as Leafs TV.

BCE, in combination with the trust fund that manages its employees’ pension plan, will pay a total of $533 million for 37.5% of MLSE. Rogers will also acquire 37.5%. A private investor will own the remaining 25%. The deal should close in mid-2012.

Unlike most sports teams, MLSE is profitable. This investment will also guarantee BCE access to live games and other high-demand content for its TV channels, radio stations and websites.

Investing in leading edge technology

BCE also continues to invest heavily in its networks. It spent $3.3 billion on capital upgrades in 2011, up 8.6% from $3.0 billion in 2010. About 60% of these funds went toward upgrading its wireline network to fibre optic technology. That will help BCE attract customers by offering faster Internet speeds and new TV services. By the end of 2012, fibre optic lines will reach 3.3 million homes in BCE’s territory.

The company is also upgrading its wireless networks to Long-Term Evolution (LTE) technology, which is up to five times faster than current wireless networks. BCE now offers LTE service in 21 Canadian cities.

Thanks to these upgrades, smartphones, like Apple’s iPhone or RIM’s BlackBerry, now account for 48% of BCE’s subscribers under long-term contracts compared to 31% a year earlier. That’s good news for BCE, because smartphone users pay higher monthly fees than its cellphone clients.

More dividend hikes seem likely

The company should earn $3.14 a share in 2012, and the stock trades at 13.1 times that estimate. BCE has raised the payout seven times in the past three years. The current annual rate of $2.17 a share yields 5.3%.

BCE is a buy.