Telus (TSX:T) is down about 13% over the past year. Retirees and other investors who use their Tax-Free Savings Account (TFSA) to own dividend-growth stocks are wondering if Telus stock is now undervalued and good to buy for a portfolio targeting passive income.
Telus stock price
Telus trades near $24.50 at the time of writing. The stock has actually rebounded from the 2023 low of around $21 but is still way off the $34 it hit in 2022.
The share price has largely followed the bond market over the past two years, as the Bank of Canada increased interest rates to try to cool off the economy and get inflation under control. Expectations for higher interest rates drove down bond prices and pushed up yields. Telus uses debt to fund part of its capital program, so higher debt costs tend to eat into profits and can reduce cash that is available for distributions. The company spent more than $2.5 billion in 2023 on capital initiatives that include the expansion of the 5G network.
The jump in the share price off the October low has coincided with a drop in bond yields over the past few months amid a bond rally that occurred due to growing expectations for rate cuts from the Bank of Canada in 2024.
Telus also came under pressure last year when it was forced to adjust its financial guidance lower as a result of weak revenue at its Telus International subsidiary that provides global firms with multi-lingual call centre and IT services. Telus said the situation improved in the back half of the year, but it still cut 6,000 employees, of which about two-thirds were in the TIXT operations.
The market reaction to the challenges at Telus International is likely overdone. Telus is still expected to report adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of at least 7% for 2023 and growth in consolidated operating revenue of nearly 10%. Strong performances from the core mobile and internet businesses helped offset the troubles at Telus International, which only contributes around 10% of EBITDA.
Dividends
Telus has increased its dividend annually for more than two decades. At the current share price, the stock provides an annualized yield of 6.1%. That’s better than any Guaranteed Investment Certificate (GIC) offered by insured providers, and investors should see the dividend continue to grow.
Is Telus oversold?
Ongoing volatility should be expected until there is clear evidence the Bank of Canada will cut interest rates this year. That being said, Telus should be a good stock to buy at the current level. If you already own the shares, it might be worthwhile to look at boosting the position on any new pullback.
Telus offers an attractive dividend that should continue to grow. If you are searching for stocks to add to a TFSA focused on passive income, Telus deserves to be on the radar.
