Monday, January 23, 2012

Lets look at BCE (BCE) today.
This posting is open for discussion and to determine the entry and exit price points by using 3 different methods. These three methods use the historical P/E, CF/S (P/CF) and the dividend (D/S) ratios. Please note that there is a ton of ratios out there.
Definitions of the following terms used:
P/E. Price divided by its earnings, which shows what multiple that a investor is willing to pay for $1 dollar of earnings.
CF/S is the same as earnings except that its referring to the company’s ability to generate cash.
D/S or Dividend per share. For this ratio you would use the dividend yield formula.
Using these historical ratios a person can estimate what the stock price range should be.
By comparing the 3 year average vs a longer term (10 year average or more) can also help to determine where the market believes the company is in its life cycle, which includes: start up (venture), growth or mature company.
BCE trades on the TSX and the New York stock exchange under the same symbol (BCE)
BCE is a Canadian telco and has well known services in the Canadian market place.
BCE is a tricky stock to review as there are a number of points that need to be considered with the estimates.
BCE for the past 15 years has had an average P/E trading range of 20.56 (high) and 10.87 (low).
BCE also had one wild swing in the past, P/E value for example in 2000 BCE had a high P/E ratio of 156 and a really low P/E ratio of 6.12 in 2007.
If you factored in BCE longer term P/E calculations, BCE had an average high of 20.58 and 15.2 being the low spanning the past 15 years. If you use these P/E numbers then the share price could rise to 64.65 (high) and 47.80 (low) which based on todays current price $42.14, it would be a buy. To me I don’t believe that BCE will return to that higher P/E ratio as BCE is a maturing company and it should be heading into a lower P/E. So at the monument I can’t see BCE getting up there in 2012. Instead I’ll be using the 3 year P/E avg which is far closer to what makes sense to me. The 3 year P/E is 13.72 (high) and 10.87 (low) which is nearer to the P/E range of todays close of 14.4
BCE has over the years had an average annual EPS growth rate of 14.78% over a 8 year average.
In this case BCE should earn about $3.20 in 2012 and using the average P/E, the estimated trading range should be $43.85 (high) and $34.74 (low). With BCE’s current price ($42.14), I believe that BCE is fully valued at this point.
If your wondering about dividend growth? Yes BCE has had growth in that area as well.
For the past 16 years (12 year average) BCE has increased its dividends by 4.7% per year and 12% on average in the past 3 years.
It should be noted that BCE has had growth spurts in dividend increases for example in 2004 the dividend increased from $1.20 to $1.32 and again in 07, 09 and again in 2010.
BCE has also had begun to lower its dividend per share in 1999 ($1.36) and continued to lower the dividend till 2001 ($1.20). BCE raised its dividend in 07 and then halved the dividend in 2008.
It was like riding a bull back then, since then BCE has been increasing its dividend every year after 2008 like clockwork.
Since BCE has been returning a good portion of its earnings back to its share owners with todays P/D gives BCE a historical range with a low of 0.62% and a high of 6.77%. The last 3 year average P/D is 5% (high) and 6.32% (low) and a current yield of 4.9% suggests that BCE is fully valued. The Dividend will support a price range of $44.49 to $35.18
It is estimated that BCE will increase its dividend in 2012 to about 2.10 from 1.96 (2011).
Note BCE has indeed increased its dividend by 2 cents in the first quarter of 2012. If this .54 per share remains the full year will be $2.16. I do suspect that BCE will increase it a little more yet this year.
BCE and its price range when using the CF/S. For the past 3 year average BCE managed to generate a solid 12.27% increase in cash flow per share. The 15 year average, BCE had managed to grow its cash flow per share by 23.11% per year. It is estimated that BCE will increase its CF/S in 2012 by 8% to 7.64 from 7.07. Using the P/CF ratio BCE has had a range of 9.25 (High) and 5.39(low) over the past 15 years, The 3 year average is much different in that its High is 5.14 and a low being 4.07
Doing that math backwards and using the CF/S times the P/CF 3 year average it works out to give a price range of $39.28 (high) and $31.10 (low).
Summing up the price ranges
Current Price $42.14
P/E Price range 43.85 to 34.75
Dividend range 44.49 to 35.18
CF/S range 39.28 to 31.10
Now on to how to trade, As I’m looking to purchase BCE I’ll be writing a put at my price estimates in this case I’m looking to write the January 2013 Put Option at $32 and try to collect a premium of 0.40. It is always best to write the put for a shorter term however BCE has a low Implied vol.
If I was a current owner and if I believe that BCE is fully valued, you could either be looking at writing a covered call at this point. The November 44 for 0.60. Looks about right. Or if you prefer, use your average price per share as the strike price.


  1. Can you discuss goldcorp please. as I would like to know what the trading ranges should be.

  2. as requested goldcorp is now up for discussion.