The Motley Fool

Will Telus Corporation Be Hammered by Rising Interest Rates?

As one of Canada’s largest telecommunications companies, Telus Corporation (TSX:T)(NYSE:TU) is often looked at by investors as a very safe and stable company with a wide moat and solid long-term fundamentals, which should provide meaningful returns over time. Certainly, over the long haul, Telus has provided investors with a very reasonable return along with a handsome yield. With interest rates remaining near all-time lows, the company has been much more attractive to income-focused investors in recent years than bonds or other fixed-income securities, which have underperformed.

As a major telecom player in Canada, Telus has seen a minor sell-off of late, which has been linked to rising Canadian government bond yields following the recent interest rate hike by the Bank of Canada. Over the past month, bond yields have risen approximately 40 basis points — a substantial climb given the fact that rates have been near record lows for some time. As an interest rate-sensitive name, with further interest rate hikes on the horizon, many investors and analysts are suggesting caution with companies such as Telus due to their consideration as fixed-income proxies in this rising rate environment.

Telus is not a cheap option for investors, considering its valuation fundamentals. Telus currently trades at approximately 16.2 times forward 2018 earnings, and it has a price-earnings-to-growth ratio of 2.84, suggesting much of the future earnings growth has been priced in to its current valuation. The company has, however, maintained a very healthy return on equity and return on assets of 15.3% and 5.8%, respectively.

Another factor investors should consider is the fact that Telus’s management has recently provided forward guidance that it is intending to reduce its capital-expenditure budget moving forward, indicating that the company may begin returning more value to shareholders, as its infrastructure spending slows over time. Telus also announced higher-than-expected subscriber growth in its major operating segments, suggesting future profitability may be higher than expected, providing investors with another reason to consider Telus at this time.

Bottom line

With a relatively protected position within the oligopoly that is the Canadian telecom space, I see Telus as a relatively insulated long-term play for investors not scared off by its current valuation multiple. I would wait to see a larger pullback in general before suggesting Telus is a buy at this point in time; however, with a number of analysts projecting earnings-per-share growth in the double-digit range for the foreseeable future, buying Telus on any near-term weakness may turn out to be a profitable trade long term.

Stay Foolish, my friends.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share. Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune. Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.