Telus (TSX:T) and TD Bank (TSX:TD) are trading at heavy discounts compared to their 2022 highs. Investors who missed the rally off the 2020 market crash are wondering if Telus stock or TD stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
Telus trades for close to $23 per share at the time of writing. The stock was as high as $34 at one point last year.
The drop has largely occurred as a result of rising interest rates. Communications companies have large capital programs to upgrade existing networks and build out new infrastructure, as they strive to meet growth in bandwidth demand. Telus uses debt as part of its funding strategy to finance its capital investments. As borrowing costs increase, profits can take a hit, and there could be a drop in cash flow available for distributions to shareholders.
On the operational side, Telus is still seeing solid growth in its core mobile and internet businesses, but the Telus International subsidiary that provides multi-lingual and IT services to global firms is struggling. As a result, Telus reduced its guidance for 2023 and announced it is cutting 6,000 jobs.
Despite the headwinds, Telus still expects consolidated operating revenue to top 2023. Dividends from the company have increased annually for more than two decades. At the time of writing, Telus stock provides a 6.3% dividend yield.
TD trades for close to $83 at the time of writing. The stock was as high as $93 earlier this year and hit $108 in the first part of 2022. As with Telus, the pullback is broadly due to soaring interest rates, but for different reasons.
The Bank of Canada and the United States Federal Reserve are trying to get inflation back down to their 2% target. In Canada, inflation soared to 8% last year. The August 2023 number came in at 4%. Central banks raise interest rates as a tool to cool off the economy and loosen up the tight jobs market. The idea is to make borrowing more expensive so that consumers have less excess cash to splurge on goods and services.
Investors are concerned that the central banks will have to force a deep recession to achieve their 2% inflation targets. If rates go too high and stay elevated for too long, the impact on banks could be messy. TD and its peers are already increasing provisions for credit losses as commercial and retail clients struggle to cover rising loan and mortgage costs. If a severe recession occurs and unemployment spikes, there could be a tidal wave of defaults.
TD remains a very profitable business in the current environment, and the bank is sitting on a mountain of excess cash that will help it ride out economic turbulence. The dividend should continue to grow and now offers a 4.6% yield.
Ongoing volatility should be expected, but buying TD stock on big dips has historically proven to be a savvy move for patient investors.
Is one a better pick for passive income?
Telus and TD pay attractive dividends that should continue to grow. If you have some cash to put to work, both stocks look cheap today and deserve to be on your radar.
That being said, Telus has the better yield right now and might be more oversold than TD, so I would probably make the communications provider the first choice for a portfolio targeting passive income.