BCE INC. $46 (Toronto symbol BCE; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 775.9 million; Market cap: $35.7 billion; Price-to-sales ratio: 1.8; Dividend yield: 5.1%; TSINetwork Rating: Above Average; www.bce.ca) is Canada’s largest provider of telephone services, with 5.3 million customers in Ontario and Quebec. It also has 2.2 million high-speed Internet customers and 2.2 million TV subscribers. Together, these services supply 47% of the company’s revenue.

BCE also sells wireless services across Canada. Its 7.8 million mobile subscribers provide 29% of its revenue.

In addition, BCE owns 44% of regional phone company Bell Aliant (see page 2). This investment supplies 13% of its revenue. The remaining 11% comes from its Bell Media division, which owns the CTV Television (30 stations), 34 specialty channels, pay-TV services and 107 radio stations.

Big bet on media has promise

Since 2011, BCE has spent over $4.6 billion buying media companies. That’s equal to 13% of its current market cap.

The biggest of these purchases was its recent acquisition of Montreal-based Astral Media for $3.3 billion. Astral owned 22 TV stations, 84 radio stations and several pay TV and specialty channels, such as the Movie Network. To win approval for the takeover, BCE agreed to sell some of Astral’s properties for a total of $682.6 million.

Media outlets rely on cyclical advertising revenue. However, most of BCE’s stations are market leaders with large audiences. That cuts their risk. These outlets also give BCE a cheap way to cross-promote its mobile and other services.

BCE’s revenue rose 13.1%, from $17.7 billion in 2008 to $20.0 billion in 2012. Earnings jumped 35.9%, from $1.8 billion to $2.5 billion. Due to fewer shares outstanding, per-share earnings rose at a faster pace of 41.3%, from $2.25 to $3.18.

The company’s network upgrades are the main reason for these gains. Including Bell Aliant, it spent $3.5 billion on its operations in 2012 and will probably invest a further $3.4 billion in 2013.

BCE will put over 70% of these funds toward its Fibe service, which uses fibre optic cable to deliver high-speed Internet and digital TV. As of September 30, 2013, BCE had 419,129 Fibe TV subscribers, up 109.5% from a year earlier.

Most of the remaining 30% will go toward increasing its wireless networks’ speed and coverage. That’s encouraging more wireless users to upgrade to smartphones, which generate higher fees for BCE than regular cellphones. Over 73% of its wireless customers on long-term plans now use smartphones, up from 60% a year earlier.

BCE borrowed the cash it needed to pay for Astral. That pushed up its long-term debt to $16.3 billion, or a high 46% of its market cap, as of September 30, 2013. However, strong wireless and Internet demand should give it plenty of cash flow to pay down the extra debt. The company also held cash of $603 million, or $0.78 a share.

Dividend, reasonable p/e add appeal

Higher interest payments will cut BCE’s 2013 earnings by 6.0%, to $2.99 a share. BCE trades at a reasonable 15.4 times our 2013 earnings estimate. It has raised its dividend nine times in the past five years. The current annual rate of $2.33 yields 5.0%.

BCE is a buy.