The Globe and Mail reported yesterday that a mutual fund with a position in BCE has begun to acquire Manitoba Telecom Services Inc. (TSX: MBT) given some similar characteristics to BCE: mainly the same industry and attractive dividend yield. Given that the privatizations of BCE is almost complete- being both the largest and perhaps the last of the private equity deals in this economic cycle- the article does raise the interesting question of what everyone is going to do post BCE being a public company. I am going to speculate as to a few options with the normal disclaimers: I am not your advisor, this blog is for informational/entertainment (?) value and please conduct your own due diligence (I do not own any of the stock below).

I am going to assume the following: many non-institutional investors who held BCE bought it because it was a widow and orphan stock: a safe, recession proof, dividend yield stock. The irony of BCE going private was that the stock was too widow and orphan for the institutions that held it (such is life in public markets where the average attention span is 4 seconds). To throw out a few financial ratios for comparison, here are some select stats for BCE as of 4:30 Monday according to Yahoo! Finance:

Share price: $40.24
p/e: 15.78
Dividend yield: 3.5%
Dividend payout ratio: 50% (measure what % of free cash is paid in dividend)

So here’s a non-exhaustive over-view of options once BCE goes private (I am going to deliberately avoid income trusts given they are more interest rate sensitive than stocks and to assume one would replace one stock with another. I am also going to avoid the bank stocks on the assumption that holders of BCE also probably own a bank stock of some type):

Apples to Apples (same or similar industry):

1. Manitoba Telecom Services (TSX: MBT): As mentioned in yesterday’s Globe and Mail, the most obvious choice because of it is also a telecom with monopoly over Manitoba and its ownership of Allstream (formerly AT & T Canada- one of BCE’s competitors in long distance). The good? MBT has a dividend yield of 5.40% and has a relatively low p/e of 8.90. The bad? Its dividend payout ratio is almost 60% which means there isn’t too much room to grow or, if you look at it a different way, it isn’t putting enough money back into the company in a competitive market. It also has not raised dividends in a while. MBT also has a fundamental business issue: its hard to crack the Bell/Rogers duo in Ontario and the Shaw/Telus duo in Alberta/B.C.; its pretty much hemmed in without them doing something really bold or being taken over which would result in shareholders who left BCE buying MBT paying capital gains twice! A nice safe stock but does it have as much legs as a rotary phone?
2. Telus (TSX: T): Becoming more wireless than land-line operator. Telus almost bought BCE but dropped out due to the short-time lines to submit a bid. Good dividend ratios in the absolute sense ($1.50/share per year) with room to grow its dividend payout ratio (36%). A high p/e ratio (19.30) and pricing which is a tad expensive for retail tastes tends to indicate that it is still seen as a growth stock and not purely a widow and orphan stock. On the plus side though, Telus is managed by arguably one of the best CEO’s in the country who’s quite young so its future is quite bright (if he stays). Question is can Telus pull a rabbit out of a hat and move up one more level?  One caution- Telus has a bad labor relations history so expect a strike/lock-out every 3-4 years to affect stock prices.
3. AT & T (NYSE: T): If you hold this stock in your RSP, you are exempt from the 15% with-holding on non-Canadian dividend (assuming you fill the proper forms). AT & T is the grand-daddy of all telecom stocks. Given its sheer size, it will be around for a while. However, AT & T is becoming expensive.; its p/e has moved into the 20’s and there’s not much room for growth of its dividends. Its dividend payout ratio is 70%. Its probably the closest replacement to BCE from the list I have compiled in that its big, full of cash but not exactly very nimble.

Apples to Oranges (different industries)

1. Rothmans (TSX: ROC): People have been smoking in North America for over 500 years. No matter what we do to ban it, someone will smoke, making this cigarette company a recession proof stock. Its actually a very boring stock- its a mature industry with little no technology, prices don’t move that much and only do so given class-action litigation; in the United States, despite multiple class-action lawsuits, none of the major tobacco companies have gone under due solely to class action lawsuits. Nonetheless, there is a litigation discount on the price so be aware. Also be aware that the company pays a staggering 81% of its free cash in the form of dividend so it is unlikely there will be too many dividend increases in the future. One final caveat on this stock- it may be boasting revenue by lowering prices which you can only do for so long before it catches up to you.
2. Johnson & Johnson (NYSE: JNJ): J n’J does just about everything health related- retail products, drugs, medical devices. It is a pretty recession proof company that has been paying out a rising dividend for an extended period of time. It has some recent volatility though and it is a tad expensive. The dividend payout ratio is quite attractive at 43%- some room to grow but also a lot of free cash being reinvested (a key in any research intensive industry like health-care). I will defer to dividend matters for more on J n’ J (please note that his analysis was done on May 31 so please adjust your analysis accordingly).
3. Fortis (TSX: FTS):  Fortis is a mostly a utility play: a hodge-podge of holdings in electricity, natural gas and some non-core assets in hotels. Its a stodgy old-world business- much like a telecom. It pays a lower dividend in an absolute sense than the other stocks on this list ($0.82/share a year) but it is also considerably cheaper. Dividend payout ratio is 49% which is surprisingly low for a utility (there isn’t too much reinvestment needed in such a mature industry). The only issue with a utility is that it is highly regulated by the government and a political sensitive asset so a business just can’t go out and acquire 3-5 competitors without regulatory and political resistance; thus, its a slow grower which makes it a good widow and orphan stock.

There are a lot more replacement stocks but these came top of mind. Let me know if you have any other suggestions.