Income Investors: Telus Corporation Is Undervalued

Telus Corporation (TSX:T)(NYSE:TU) has been flat for two years now. It’s been difficult for the company to breakout recently because defensive stocks have become less favourable with the average investor. Sure, interest rates are expected to rise at a faster rate under President Trump, and cyclical stocks could see the most upside in the medium term, but that doesn’t mean you should dump all your solid defensive stocks like Telus.

I would recommend being a contrarian and scooping up shares of defensive names like Telus because they’re on sale right now, and defensive stocks will inevitably become favourable again once the bullishness fades. Although the bull still has legs, we’re in the late stages of a very old bull market. The next phase will involve a move back into defensive names, and by then, defensive stocks will be trading at a premium, not at a discount as they are right now.

Terrific customer service will keep retention rates high

Telus has the best customer-retention rates thanks to its top-notch customer-satisfaction initiatives, which I believe is overlooked by many investors. There’s no question that it can be a very frustrating experience as a customer to call your wireless or internet service provider regarding a problem. The customer service team at Telus is doing everything in its power to keep its customers happy; they have the freedom to offer perks as an apology for an outage, slowdowns, or any other issue that is bound to happen in the telecom business.

Sure, the cost of the perks will add up, but if you take a step back and look at the big picture, the small price of the perks actually results in higher customer loyalty, and the customer will be more likely to sign another contract down the road. The low customer churn rates make Telus one of the most solid blue-chip dividend-growth stocks in the market today.

Shaw Communication Inc. (TSX:SJR.B)(NYSE:SJR)’s wireless segment, Freedom Mobile is set to be the fourth major player in the Canadian telecom scene. The company will threaten to steal a huge chunk from the Big Three’s customer bases, and it will be interesting to see how Telus holds up. Freedom Mobile’s goal is to have the perfect balance between affordability and reliability, and I think it will be a serious threat to the Big Three over the next few years.

Telus’s high customer-satisfaction results and high retention rates will allow the company to weather the storm that is Freedom Mobile’s entrance into the Canadian telecom scene. Although many believe Telus’s customer base may be the most at risk of losing customers, I would argue that it’s the least at risk because of its industry-leading customer service, which I believe will serve as a small moat in over the medium term. This moat isn’t impenetrable, but I think it’s enough to give it an edge over its peers in the Big Three.

The stock currently offers a juicy 4.5% dividend yield which will grow by leaps and bounds over the next few years. If you’re looking to play defence, then you should strongly consider adding shares of Telus to your portfolio today.

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Fool contributor Joey Frenette owns shares of Telus Corporation.

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