When we fall into a bear market, defensive dividend stocks, including telecoms like Telus (TSX:T)(NYSE:TU), should be on your shopping list. The coronavirus pandemic has the potential to spark a severe recession.
The recession is going to cause indebted Canadians to tighten the belt even further. Although it’ll be tougher for them to make monthly telecom payments, the phone bill will likely be among the first expenses that can’t be cut.
Mobility has become an essential service, especially to millennials, so even as we face economic hardship, it’s telecoms like Telus that can continue raking in ample amounts of cash flow. Sure, cash flows will be less rich than when times are good when Canadians opt for fancier phones with larger data packages.
But relative to most other firms out there, the telecoms will be among the few firms that will not only retain their dividends, but also stand to increase them in the depths of the downturn.
What appeals to me about Telus is the fact that it doesn’t have “dying” legacy media assets. In its place, the telecom titan has compelling firms such as Telus Health and Telus International, two small businesses that have the potential to grow at a staggering rate over the long haul.
Sure, Health and International aren’t yet large enough to call Telus a well-diversified telecom, but not having depreciating legacy media assets on its own makes Telus a standout telecom relative to its peers.
Telus has a reputation for giving stellar quality of service alongside best-in-class customer service. These two underrated traits bode well for the firm’s reputation with Canadians over the long haul and will help Telus retain its subscribers when competition becomes that much fiercer in the Canadian telecom scene.
Despite Telus’s impressive reputation, the company won’t be immune from disruption as competition (and the federal government) look to drive prices for essential telecom services down.
Telus and its Big Three peers are on notice. They have two years to cut their rates by 25% or face the consequences, which means that Telus’s margins could fall under pressure a lot sooner than initially thought.
As such, investors should demand a margin of safety on the name even though it’s a well-run defensive kingpin that will benefit from the lower cost of borrowing in the push to the next generation of telecom tech.
Telus has a 5.2%-yielding dividend that’s completely safe. But compared to other bargains in the TSX, Telus’s dividend leaves a lot to be desired. Moreover, Telus isn’t precisely what you’d consider a steal after a near-30% plunge in the stock market. Telus shares trade at 15.6 times next year’s expected earnings and 2.7 times book.
The stock seems to have a considerable defensive premium already attached to it already and doesn’t seem to account for the margin pressures that will come in two years.
As such, investors should wait for a pullback to below $20 before initiating a position in a name that could fall at the hands of competition over the next few years.
The stock seems fairly valued at best. So, I don’t think Telus is a name that can “make you rich” in a downturn. But if you seek a stable 5.2% yield, that’s exactly what you’ll get from the name. Don’t expect much else, though.
The competition is too fierce, and I don’t want to own shares of a company that’s being pressured to lower prices by the federal government.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.