Shares of Canada’s second-largest telecom company by market cap, TELUS (TSX:T), have been on a decline for a while now. The selling pressure increased after the company came out with its fourth-quarter and annual earnings last week. They are now trading close to their 52-week lows and have lost around 14% in the last 12 months.
Why are TELUS shares underperforming?
Although TELUS reported decent top-line growth for the fourth quarter, it posted a sizeable decline in its quarterly net income. It posted a total profit of $265 million for the quarter that ended on December 31, 2022. This was a massive 60% drop from the fourth quarter (Q4) of 2021. Higher costs due to inflation weighed on its earnings in the latest reported quarter.
It’s not only TELUS; almost all telecom stocks have been on a decline since last year. Record-high inflation and rapidly rising interest rates have dented investor sentiment. As bonds turned more attractive amid rising interest rates, investors dumped dividend-paying telecom stocks.
Moreover, telecom is a capital-intensive business, and companies carry a large amount of debt. As interest rates rose, debt-servicing costs notably jumped, impacting their profitability.
TELUS and its recent earnings
TELUS reported a net income of $1.7 billion on total revenues of $18.4 billion revenues last year. Compared to 2021, that was an increase of 7% in revenues and 1% in profits.
TELUS saw an industry-leading expansion with total telecom net additions of more than one million customers last year. At the end of December 31, 2022, TELUS had total telecom subscribers of around 17.9 million and wireless subscribers of around 9.7 million.
The average revenue per user came in at $58.1 last year — a marginal 1.8% increase year over year. It is a vital measure in the telecom sector. It is calculated as total wireless revenue divided by the total number of subscribers.
Canadian telecom is an oligopolistic industry with three leading players sporting around 30% of the market share each.
Should you buy T stock now?
TELUS shares should see a comeback soon, driven by robust 2023 guidance and an easing macroeconomic picture. TELUS management expects free cash flows of $2 billion in 2023, implying a steep 56% increase compared to last year. It also expects annual revenue growth of around 12% in 2023.
Policymakers will likely pause interest rate hikes this year, as indicated by the cooling inflation print recently. At least, we might not see last year’s hurried pace continuing this year. This might bode well for markets overall and drive stocks higher.
Capital-intensive and dividend-paying businesses like telecom might see some respite. Investor sentiment around them should improve this year with more stability and certainty in benchmark interest rates.
Telus versus BCE stock
Note that TELUS does not look significantly weak from an investment perspective. However, peer BCE (TSX:BCE) looks relatively better positioned to outperform its peers. It has been aggressively investing in network infrastructure in the last few years. This might result in subscriber growth and improved financials. On the balance sheet front as well, BCE is well capitalized with reasonable leverage. It offers a better dividend yield of 6% compared to TELUS’s 5%.