Is BCE the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if BCE (NYSE: BCE  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at BCE.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.6% Fail
  1-Year Revenue Growth > 12% 1.9% Fail
Margins Gross Margin > 35% 72.6% Pass
  Net Margin > 15% 12.6% Fail
Balance Sheet Debt to Equity < 50% 65.5% Fail
  Current Ratio > 1.3 0.60 Fail
Opportunities Return on Equity > 15% 14.2% Fail
Valuation Normalized P/E < 20 13.92 Pass
Dividends Current Yield > 2% 5.6% Pass
  5-Year Dividend Growth > 10% 4.4% Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just three points, BCE doesn't look like a perfect stock. As Canada's legacy telecom provider, the company has a combination that U.S. investors would be quite familiar with: healthy yields and low valuations with questionable growth prospects going forward.

BCE, which stands for Bell Canada Enterprises, has the typical combination of phone, Internet, and satellite TV products for residential and business customers that you'll find at most stateside telecom companies. The company has seen some interesting times in recent years, as a proposed $41 billion leveraged buyout of BCE by several institutional investors -- including Ontario's teachers' pension plan -- lingered for a year and a half in 2007 and 2008. Auditors finally shot the deal down during the depths of the financial crisis when they concluded that the new entity wouldn't be solvent after the takeover.

Since then, BCE has seen its stock more than double. Yet it struggles with many of the same challenges you see elsewhere in telecom. Like AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , BCE has somewhat high debt levels, weak growth, and dividends that, while high, don't have huge potential for future growth. Closer to home, BCE competes well against Telus (NYSE: TU  ) , but Rogers Communications (NYSE: RCI  ) has much better returns on equity at a fairly similar valuation.

BCE has the payout to attract dividend investors seeking some international exposure. But unless the telecom giant finds a way to reignite strong growth, BCE has a long way to go before it could become the perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add BCE to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Rogers Communications is a Motley Fool Income Investor recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2011, at 11:31 AM, rcopple wrote:

    I don't disagree with the analysis and conclusion. However, "Since then, BCE has seen its stock more than double." clangs. It could be noted that this is after the stock crashed by about half when the buyout was axed.

  • Report this Comment On April 11, 2011, at 2:41 PM, sonic41 wrote:

    BCE

    Ah ! well a-day ! what evil looks

    Had I from old and young !

    Instead of the cross, the Albatross

    About my neck was hung

    Coleridge

  • Report this Comment On April 19, 2011, at 9:45 AM, bceowner wrote:

    I am a Canadian who owns BCE shares and uses there services for internet and home phone. BCE and RCI ( rogers ) have VERY SPECIAL PLACES IN THE CANADIAN TELECOMMUNICATIONS BUSINESS THEY ARE ALMOST WITHOUT COMPETITION AND THE WORLD IS MIGRATING AWAY FROM THE TELECO CONGLOMERATE. ROGERS IS ALMOST THE ONLY CABLE PROVIDER (NEARLY 85 % OF THE COUNTRY) AND BELL IS ALMOST THE ONLY PHONE PROVIDER. THIS MAKES THEM VERY STUPID TO DEAL WITH. THEY ONLY STAY IN BUSINESS AND MAKE PROFITS BECAUSE THEY HAVE LITTLE COMPETITION. I DO NOT KNOW WHAT IT IS LIKE TO DEAL WITH VERIZON OR TIME WARNER BUT THESE PEOPLE ARE IMPOSSIBLE. THE CUSTOMER SERVICE EXPERIENCE IS HORRENDOUS. I PERSONALLY GET ALL MY VIDEO CONTENT VIA THE INTERNET AND ROOFTOP ANTENNA. I NO LONGER USE BCE'S DISH OR ROGERS CABLE. IT IS NOT A GREAT GROWTH AREA AND THUS THE HIGH DIVIDEND.I BOUGHT IT DURING THE DARK DAYS OF 2009 AT 28 CDN AND IT NOW SITS AT 35 SO I DID OK. DO NOT EXPECT BIG MOVES FROM THIS DINOSAUR THERE ARE TO MANY MAMMALS CREEPING AROUND EATING ITS FOOD. THE CUSTOMER EXPERIENCE IS AWFUL. I HAD A LATE FEE ON MY VERY FIRST BILL. IT TOOK 10 PHONE CALLS TO EXPLAIN WHY IT WAS IMPOSSIBLE TO HAVE A LATE FEE ON MY FIRST BILL. THEY HAD CHARGED FOR A MONTH PRIOR TO SIGNING UP AND BILLED ME A LATE FEE. WHEN I CALLED THE PHONE SIDE OF BILLING SUPPORT THEY COULD NOT TELL ME WHAT THE INTERNET SIDE WAS DOING AND VICE VERSA SO THEY BOUNCED ME BACK AND FORTH. EVERY CANADIAN HATES BCE AND RCI. THEY ARE AN UNFORTUNATE BY PRODUCT OF BEING CANADIAN.

    THANKS

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