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Where investors should be putting their BCE money

Daily Buy-Sell Adviser
0 Comments|September 3, 2008

Smart money will seek out investments that offer the same safety and solidity as Ma Bell used to.

The BCE Inc. (TSX: T.BCE, Stock Forum) sale will release a flood of money-seeking new investments, but the obvious choices may not be the best ones, says this analyst. 

Yes, Mother Bell is about to retire—at least as far as investors are concerned. 

The phone company will still be around, of course. But for the first time in generations, Canadian investors will not be holding the shares of the company founded by Alexander Graham Bell. 

This is not simply an exercise in nostalgia, however. When the Bell sale goes through in December, a lot of money will change hands. And a host of Canadian investors will be looking for a good place to put their capital gains from Bell.  

In order to get a reading on just where all that money may go, we turn to a seasoned observer of the investment scene who was also with Bell Canada at one time, Mr. T. E. Gardiner. 

Writing in Investor’s Digest of Canada, Mr. Gardiner reviews a number of logical parking places for Bell money. He is not enthralled with some of the more obvious choices, and reveals several surprising options he thinks will be better for investors in the long run. 

Doubts in the market 

The private sale of BCE Inc. engineered by the Ontario Teachers’ Pension Fund now seems sure to go through, albeit six months later than planned. 

“But for some reason,” Mr. Gardiner writes, “the market seems to have some doubts since the shares currently trade somewhat below the offer price of $42.75. There may be an opportunity for some arbitrage if you’re not risk-averse.” (It opened Tuesday at $40.24.) 

While this analyst commends the management of BCE and Teachers for “stickhandling” through all the legal, financial, and regulatory obstacles they faced, he’s not as impressed with the decision to cancel the final dividends. The company saves money, but at what cost? 

“Since many of these shareholders are also employees of BCE or its major subsidiary, Bell Canada, it’s not a good move by the new owners in terms of morale.” 

Moreover, he adds, “it’s also a bit sad to see Ma Bell, the grand old lady of the Canadian stock market, disappear.” It was his first investment in the stock market, and two generations of his family before him owned Bell shares. That story could be repeated in many Canadian families. 

But as Bell exits stage right, at least one part of the company will still be attracting investors’ money. 

One better than the other 

Bell Aliant Regional Communications Income Fund (TSX: T.BA.UN, Stock Forum), which runs wireless and retail networks in largely rural areas of eastern Canada, remains on the stock exchange. 

“Like most long-term shareholders,” says Mr. Gardiner, “I acquired several units when they were spun off in 2006, although I’m not going to add any more.” 

He is not impressed with another oft-mentioned choice to replace Bell, Yellow Pages Income Fund (TSX: T.YLO.UN, Stock Forum). He’s not sure its Internet operations will be profitable enough to overcome the creeping obsolescence of its business directories. Failing to list businesses in the white pages was also a poor decision, he believes.  

Then there are the two big telecommunications firms that will remain on the market when BCE disappears. One is better than the other, in this observer’s opinion. 

Telus Corp. (TSX: T.T, Stock Forum) has an attractive dividend yield of 4.2% and a promising price/earnings ratio of 10. 

Manitoba Telecom (TSX: T.MBT, Stock Forum) has an even better yield of 6.2%, but its P/E ratio is a bit high at 17.6. And it has one other drawback, in Mr. Gardiner’s view. Its dividend payout ratio is almost 100 – “I don’t think its dividends are sustainable.” On the other hand, it could be a takeover target, which would be a nice windfall for investors. 

Not the best place 

OK, how about the cable companies? Mr. Gardiner does not like Cogeco Inc. (TSX: T.CGO, Stock Forum). Its trailing P/E ratio is too high and so is its dividend payout ratio of 150%. Rogers Communications Inc. (TSX: T.RCI.B, Stock Forum) and Shaw Communications Inc. (TSX: T.SJR.B, Stock Forum) fare better in these two respects, but there is still a problem, he says. 

“The biggest drawback to Rogers and Shaw in my perspective,” he writes, “is that the most widely traded class of shares for both firms are the non-voting shares.” The voting shares are more thinly traded and carry a market price premium. This lowers the dividend yield and pushes up the P/E ratio. If this doesn’t bother you, he adds, you might consider these two cable firms. 

But Mr. Gardiner’s conclusion is clear. If you’re looking for a place to put BCE money, “I’m not sure the telecom sector is the best place for it.” 

Telus and Bell Aliant “seem reasonable,” he adds, while Manitoba Tel, Rogers, and Shaw are acceptable, but riskier than BCE was. 

So where should you go? To a group of reliable companies that deliver, not telecom services, but oil, gas, and electricity. 

Attractive, not glamorous 

“If you are looking for something of similar quality to BCE,” Mr. Gardiner tells his Investor’s Digest of Canada readers, “some of the other utilities (including pipelines) are probably the way to go.” 

Four companies look attractive, he says: TransCanada Corp. (TSX: T.TRP, Stock Forum), Enbridge Inc. (TSX: T.ENB, Stock Forum), Canadian Utilities Ltd. (TSX: T.CU.X, Stock Forum), and Fortis Inc. (TSX: T.FTS, Stock Forum).  

“They are not glamorous,” he concludes. “In fact, they are downright boring, but they all have a record of steady, increasing dividends, and their earnings should be relatively secure over the next few years. 

“I’m expecting the markets to be quite volatile for the next little while, and they look like a safe, quiet place to put your money—just like Ma Bell used to be.” 

So a good deal of BCE money may go searching for a home in the same business as Bell. But as far as this observer is concerned, the smart money will seek out secure havens that deliver the same safety and solidity that Ma Bell offered for generations of investors.   


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