Telecom utilities have had a rough 2018. When interest rate began to rise, investors dumped the shares of top telecom stocks on hopes that they can be compensated better by owning government bonds.
But that situation is unlikely to persist in 2019, as there are clear signs that the central bank will prefer to stay on the sidelines amid falling oil prices, risk to the housing market, and the trade war between the U.S. and China. In this changing macro environment, telecom stocks are gaining their shine again.
In Canada, there are three top telecom companies that control much of the local market. Among them, Telus Corp. (TSX:T)(NYSE:TU) is a top dividend stock you should consider. Here are the strengths that make Telus make both a growth and a defensive play.
A growing income stream
Canada’s telecom companies are great cash cows. Simply put, they operate in an oligopoly where each operator has a big enough share of the pie to generate strong cash flows. On that front, Telus has a good track record.
In November, the company announced a 7.9% hike to its quarterly dividend, increasing the payout to $0.545 per share. Telus is targeting 7-10% growth in its dividend each year.
The operator was able to reward its investors as it continues to add more subscribers to its network. In the third quarter, the company beat analysts’ forecasts for new television and internet subscribers. It added 36,000 new internet customers and 18,000 TV subscribers in the period, almost doubling analysts’ expectations.
At its larger wireless division, it attracted 109,000 new contract customers, which was also ahead of estimates for about 105,000. Telus reported total revenue of $3.77-billion, up 11%, while profit rose by 10% to $447-million.
In the quarter, Telus’ reported consolidated revenue and EBITDA growth of 11% and 8.2%, respectively, and free cash flow growth of 41%.
In my view, Telus is in a much better position to grow its dividends going forward when compared to other operators, largely because the company has already invested heavily to improve its infrastructure. It expects its fibre build to be two-thirds complete in 2019 when it starts launching 5G networks.
Trading at $46.19 at the time of writing, Telus shares are trading close to the 52-week high. But according to analysts’ consensus price target for the next 12 months, its stock has the potential to reach $51.
Irrespective of the potential capital gains, I find Telus’ forward dividend yield of 4.7% quite attractive when the bond yields have begun to decline. When compared with Canada’s 10-year bond yield, which is hovering around 2%, investors will get a good premium by owning Telus stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Haris Anwar has no position in any stock mentioned.