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Analyst Blog

We remain on the sidelines on Canada’s largest telecom carrier BCE Inc. (BCE - Analyst Report) following its first quarter results. Consequently, we have recommended a long-term Neutral rating on the stock supported by the Zacks #3 (Hold) Rank. BCE Inc. is a 100% subsidiary of Bell Canada.

First quarter earnings missed the Zacks Consensus Estimate by a penny but were above the year-ago earnings. BCE is expected to generate healthy growth in revenues, EBITDA and free cash flow on higher wireless revenue, stable wireline revenues and cost reduction methods. For 2011, BCE expects adjusted earnings in the range of C$2.95–$3.05 per share, reflecting a 6–9% increase year over year.

We believe significant investments made in 2010, continued growth in smartphone adoption, an expanding wireless network (HSPA+) with higher technology and speeds as well as the expected launch of 4G Long-Term Evolution (LTE) wireless networks in the yearwould boost results for the wireless business.

In the wireline front, Bell Canada continues to benefit from improving network access services (NAS) erosion, high-speed fiber-to-the-node and fiber-to-the-home broadband deployments as well as the growing traction in both Fibe Internet and Fibe TV service.

Further, we believe the expected synergies derived from the CTV acquisition, the new Bell Media unit as well as increased dividends reflect management’s optimism for 2011. BCE completed the CTV acquisitionin April, a full quarter ahead of the original schedule that will be approximately 7 cents accretive to earnings per share in the nine-month period (April to December).

From the second quarter, the company will reward shareholders with an increased dividend of C$2.07 per share, which was up 5% from the last dividend of C$1.97. The company hiked its dividend six times in the past two years and represents an increase of 42% since the fourth quarter of 2008. BCE will maintain its dividend payout ratio of 65% to 75% of adjusted earnings per share in 2011.

On the flip side, BCE operates in an environment crowded with new wireless carriers. BellCanada competes against two other national carriers Telus Corporation (TU - Analyst Report) and Rogers Communications Inc. (RCI - Analyst Report). Intense price competition is forcing prospective and existing customers to opt for discounted monthly rate plans offered by competitors. Both Rogers and Telus are aggressively promoting cheaper price plans with more services through their respective discounted brands.

The wireline business also remains challenged by competition from cable companies and other alternative service providers. Additionally, Bell Canada continues to experience declines in average revenue per user, which the lowest among the three national carriers largely due to decreasing voice usage and roaming as a result of a weakening Canadian economy.

Further, satellites used by Bell TV are subject to significant operational risks and satellites yet to be built are subject to construction and launch delays. Both could have adverse effects on Bell TV’s business and financial results.

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