Telus Stock: Keep Your Eye on the Prize

Telus (TSX:T) stock is one of the highest-yielding telcos in Canada.

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Telus (TSX:T) stock has taken a beating this year. Down 11.74% for the year, it has underperformed the broader markets. 2023 has been a mostly bullish year for equities. U.S. tech stocks have rallied, Canadian energy stocks have made gains, and the broad-market indexes are up. It would seem that this has been an easy year to make money in. Still, Telus stock is hurting. In this article, I will explore the factors that are holding T stock back and whether they will abate in the near- to medium-term future.

Recent earnings

One factor holding Telus stock back this year is its earnings. The most recent quarter missed analyst expectations, delivering the following metrics:

  • $4.93 billion in revenue, up 12.8%
  • $200 million in net income, down 57%
  • $0.14 in diluted earnings per share, down 58%
  • A 4.05% profit margin, down 60%

Not only did the release miss analyst expectations, but it also showed declines in every earnings-related metric except revenue. So, Telus’s profits declined severely last quarter. There are few arguments against that claim that would hold water upon scrutiny.

Dividend potential

Although Telus’s recent earnings haven’t been so hot, the company has one thing going for it: A high dividend yield.

At today’s prices, Telus stock yields 6.2%, which means that you’d get $6,200 in annual cash back from the stock by investing $100,000 in it if the dividend never changed. But change it may well do! Historically, Telus has tended to raise its dividend, which has benefitted those who invested in the past.

Today, the picture is murkier. T stock has a 136% payout ratio, which means that it pays more in dividends than it earns in profit. It probably wouldn’t be wise for Telus’s management to raise the dividend dramatically this year, but holding it steady could work.

Valuation

Last but not least, we get to Telus’s valuation. At today’s prices, Telus stock trades at the following:

  • 22 times adjusted earnings (i.e., earnings calculated using unconventional accounting rules)
  • 28 times GAAP (generally accepted accounting principles) earnings (i.e., earnings calculated in the standard way)
  • 1.7 times sales
  • Two times book value
  • 7.9 times operating cash flow

This is not a particularly expensive stock. However, many Canadian banks are far cheaper than Telus while having positive earnings growth. On the whole, I’d say that Telus’s valuation argues for putting the stock in the “to research further” pile, but it’s no “cinch” that you’d run out and buy without thinking.

Foolish takeaway

Telus, as a company, is not going away anytime soon. Millions of Canadians count on the company for cellular service. It has one of the nation’s largest 5G networks. Its cellular network is reliable, and its prices are reasonable. The company has much going for it.

However, its stock has come upon hard times for reasons that aren’t entirely undeserved. It has a high payout ratio. Its earnings are declining. Its revenue is growing but not very rapidly. There are very real risks to be aware of with this stock. On the whole, I’d consider it a “hold” but not a clear buy.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

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