Change brings volatility. While change is the only constant, the pace of change can make a world of difference. For instance, the change the pandemic brought in such a short time of two years disrupted the airline industry. Similarly, the sharp jump in the interest rate from 0.25% to 5% in a year disrupted companies with high leverage. And now, a sharp regulatory shift has put telecom stocks on their toes. Telus Corporation (TSX:T) stock is down 37% from its all-time high. Is this stock a buy right now?
Why is this dividend stock down 37%?
Telus has been investing heavily in building fibre-to-the-home infrastructure. This capital spending is for a technology upgrade that will create a 5G ecosystem. This ecosystem will generate revenue for several years through subscription fees for the Internet and other related services. It is this infrastructure that earns telcos revenue and motivates them to build state-of-the-art infrastructure.
However, the telecom regulator asked Telus and BCE to share this very source of income with competitors for a discounted rate. While BCE retaliated by cutting capital spending and jobs, Telus maintained capital spending and voiced its disagreement.
The regulator’s proposal was to provide temporary access to competitors in Quebec and Ontario to promote competition. Quebecor is already emerging as a worthy competitor. If this pilot is a success, the regulator could spread this new competitive landscape across all regions of Canada and make it permanent. Such a rule could disrupt the profit margins of Telus, which invests billions of dollars in building the infrastructure.
The first to take a hit from such a change would be equity shareholders. If cash flows reduce, so will dividends. As a result, Telus stock has been on a downtrend. As May nears, tensions are rising. Moreover, the US March 2024 inflation of 3.5% has made investors doubtful if interest rate cuts would come as expected. A prolonged high-interest rate will make accessing capital expensive for Telus amidst regulatory and competitive headwinds.
Is this dividend stock a buy right now?
The court ruling on the regulator versus the telco will determine which direction the stock will move in. The court may rule in the telcos’ favour to keep investment in telecom infrastructure attractive to investors while promoting competition. Otherwise, the quality of telecom services might dip as infrastructure may not receive as much investment as it receives today. Telco stocks could see a sharp surge if this happens.
If the regulator continues giving access to competitors, telco stocks might dip moderately. Investors have already priced in this uncertainty with the 37% dip in Telus stock. Moreover, any interest rate cut could push Telus stock upwards.
How to invest in Telus
While there is some uncertainty, the dip of 37% and a dividend yield of 6.95% is too attractive an opportunity to let go. In the worst-case scenario, Telus might pause dividend growth but not cut dividends.
The stock could fall further, but you could use this downtrend to your advantage and buy some stock every month and reduce your average cost per share. You could opt for Telus’ dividend reinvestment plan (DRIP) whereby your Telus dividend is used to buy more of its stock without any brokerage fees. When the stock recovers, you can enjoy the rally.
