Telus (TSX:T) and TD Bank (TSX:TD) are two of Canada’s top dividend payers. The pullback in the share prices of communications stocks and bank stocks has investors wondering if Telus and TD are now undervalued and good to buy.
Canadian savers are using their Tax-Free Savings Accounts (TFSAs) to build portfolios of top TSX dividend stocks that can deliver reliable tax-free passive income.
Telus
Telus trades near $25.50 at the time of writing compared to more than $34 at the 2022 high.
The decline in the share price appears overdone, considering the solid first-quarter (Q1) results and the positive guidance for 2023. Telus reported record Q1 net customer additions of 58,000 in the first three months of this year. Consolidated operating revenue increased by 16% over the same period in 2022, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 11%.
Telus confirmed its 2023 guidance for operating revenue growth of 11-14% and EBITDA growth of 9.5% to 11%. Higher borrowing costs are putting a dent in earnings and cash flow, but capital expenditures will be lower than in 2022. This will support a net boost in free cash flow to about $2 billion. That’s good news for income investors.
Telus raised the dividend when the company announced the Q1 results. Investors who buy Telus stock at the current level can get a 5.7% dividend yield. Telus usually raises the payout by 7-10% per year.
TD Bank
TD generated adjusted net income of $3.75 billion in fiscal Q2 2023, up from $3.71 billion in the same period last year. The solid performance occurred, even as TD increased its provision for credit losses (PCL) to $599 million from $27 million in fiscal Q2 2022.
The steep increase in interest rates in Canada and the United States over the past year is putting pressure on borrowers with too much debt. Defaults are expected to rise in the coming quarters as the full impact kicks in, and this could put pressure on bank earnings.
On the positive side, there is a chance the central banks will be able to navigate a soft landing for the economy, as they battle to get inflation under control. A tight jobs market and record immigration levels in Canada should help avoid a surge in bankruptcies and provide support to the housing market. TD has a large portfolio of Canadian residential mortgage loans, so a meltdown in house prices caused by a spike in defaults would probably put more pressure on the stock price.
That being said, TD already looks oversold. The stock trades near $80 per share at the time of writing compared to more than $108 in early 2022.
Earnings growth will not hit previous guidance of 7-10% due to the cancelled US$13.4 billion all-cash acquisition of First Horizon, a U.S. regional bank. TD, however, is now sitting on a war chest of extra cash. The added capital cushion will help TD ride out economic turbulence if things get really ugly. At the same time, TD has the firepower to buy back stock, boost the dividend, and grow the American operations organically by opening new branches.
Investors who buy TD stock at the current level can get a 4.75% dividend yield.
Is one a better pick for passive income?
Telus and TD both pay attractive dividends that should continue to grow. If you have some cash to put to work I would probably make Telus the first choice today for the higher yield.
TD deserves to be an anchor position in a buy-and-hold income portfolio, but there might be more volatility in bank stocks over the coming 12 months, and investors could see an even better entry point emerge.
