Sticking with Bell, hoping to ring up gains

Benj Gallander and Ben Stadelmann
Thursday, July 29, 2010

Over our more than three decades of investing, there can be no question that mistakes have been made. Unless you only dip a toe into the markets, the passage of time makes it inevitable that you’ll err. Those who suggest they have a blemish-flee record are either liars, are exceedingly forgetful or have divine providence on their side. Perhaps all three.

One of Benj’s picks that turned into a rout was one of his rare arbitrage plays: BCE. You’ll likely remember that Bell was supposed to be acquired by a group led by the Ontario Teachers’ Pension Plan for $42.75. There was sufficient doubt about the compact actually being made — especially as the economy unravelled — that the stock regularly traded below the offer price. Benj bought in at $36.26 in March 2008, betting that the transaction would come to pass, generating a quick and tidy return of 20 percent plus in only a few months, with a dividend to boot.

Alas, it was not to be. The deal was derailed in November 2008, plummeting the stock to the $25 range. While Benj pondered whether to take a tax loss, the price drooped further, below $21. This was proving to be one speedy slide.

Clearly, the investment strategy had backfired. The question now became how to salvage the situation. Was the stock a good investment at these lowly levels? After considerable thought, highlighted by much hemming and hawing, Benj decided to hold on.

A few major points informed that decision. The first was that BCE had, for years, traded at much higher levels. Despite the old truism that past returns are not necessarily indicative of future results, it seemed reasonable to assume that, in this case, upside was eminently achievable.

Secondly, though the dividend had been cancelled to get the takeover done, it would likely be reinstated now that the deal had fallen through. It was not clear exactly when that would happen, but it was a fair assumption that that day would not be long in coming.

Third, the relatively new president and CEO, George Cope, had a stellar reputation. While BCE had a reputation as a somewhat stodgy behemoth, Cope looked like the kind of modern guy who could help the company evolve. Recent results certainly indicate a healthy enterprise: earnings in the most recent quarter were $608 million, revenues were up 3.8 percent year over year and cash flow was up significantly.

Sticking with the investment has undoubtedly paid off. The stock currently trades around $31.50, so while underwater to the tune of 13 percent, it’s more than halfway back to the surface, so to speak. The dividend, reinstated in December ’08, is currently a healthy $1.74 a share, for a yield of 5.5 percent, which beats the socks off of GICs, T-Bills and many alternatives. Benj plans to hold the stock for the yield as well as the possibility of appreciation.

The critical element in this ordeal was that he did not panic when the ride turned bumpy; instead, he considered the best way out of a crappy situation. Ultimately, It meant finding the wherewithal and patience not to pull the trigger too quickly on a loser. That strategy, often enough, is a key to boosting financial returns.