Can This Income Stock Still Provide Strong Returns?

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Canadian telecom behemoth, BCE (NYSE: BCE) is one of the few companies offering a high yield and a history of consistent earnings growth, as well as a relatively low beta. The combination of an attractive dividend, growing profits and low risk has allowed for a solid total return, as the shares have been on a nice upturn from early 2009 until recently. When combined with the payout, investors have realized a massive total return.

Growth and Income

BCE was one of several equities (not MLPs) that passed a stock screen for the following values:

1. The stock must yield at least 5%, a sizable hurdle but one that many foreign stocks and ADRs surpass. BCE regularly increases its dividend and dishes out about 55% of its income to shareholders.

2. Share-earnings growth has exceeded 5% for the last three years on average.

3. The beta is less than 1.0, indicating below-average risk, a quality held by most high-yielding stocks.

4. A P/E between 10 and 15

Another notable match under this screen’s criteria was GlaxoSmithKline PLC (NYSE: GSK). The British pharmaceutical is fundamentally strong. It looks to be continuing on a path of bottom-line growth this year. GSK is a good buy and hold selection and its current price may represent a worthwhile entry point.

Additionally, domestic tobacco producer Lorillard, Inc. (NYSE: LO) showed up on the screen results. Impressive 3-year-average earnings growth of nearly 13% helped place LO on the list. It yields just over 5% annually. The maker of Newport cigarettes is on track to post a more moderate increase this year, with price hikes and market share gains driving growth.

What’s Next for BCE

BCE, like most telecoms, is experiencing access line count deterioration in its core wireline business. Still, a surging postpaid subscriber count and rising average-revenue-per-user (ARPU) are bolstering its Wireless results. This is occurring as its prepaid customer base is eroding at a pace of roughly 15% year over year. BCE also owns a fledgling, and rapidly improving Media business, including television, radio, and digital media properties.

Adjusted share earnings slipped in the September quarter, to $0.76, from $0.93 in the prior year. It seems likely that this soft quarter will be an anomaly caused largely by a higher tax rate. That said, for BCE’s above-5% bottom-line growth stretch to persist, it might need a pickup in the Canadian economy. GDP inched up a sluggish 0.10% in the third quarter. Better conditions usually encourage more long-distance calling and reduced line cancellations.

Investments in broadband networks and services are one of the initiatives BCE is counting on to sustain growth, including the planned rollout of 4G LTE wireless services. It would also like to accelerate the positive trends in its Wireless operation and limit Wireline weakness partly through targeting small businesses. Overall, it is aiming to remain on the leading edge of emerging broadband platforms.

Investment Advice

As a high-quality income holding, BCE remains enticing. Those seeking capital appreciation may well reap gains from a resumption of the profit upturn, too. This would likely require a more favorable economy, along with a warm reception to new offerings such as 4G LTE.

dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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