Telus (TSX:T) stock slipped 37% since April 2022 and is now trading at its pandemic low of below $22. It’s not just Telus; BCE’s stock price is also trading at a decade-low. The question is, how low can it go?
Image source: Getty Images
How low can Telus stock go?
The telecom stocks will continue to fall till May 2024, as that is when the six-month deadline of the Canadian Radio-television and Telecommunications Commission (CRTC) will end. In November 2023, the regulator asked BCE and Telus to temporarily share their fibre-to-the-home networks with competitors in Ontario and Quebec at discounted prices. Depending on how the move goes, the regulator could make the decision permanent and extend it to other provinces.
The telcos retaliated, saying such discounted access is not fair on their part as they spend billions of dollars on building the infrastructure. And that capital investment is only viable as they know they can earn returns over the long term through subscriptions. Giving access to competitors who did not invest in the infrastructure will reduce the return on assets (ROA) and discourage investors from investing in their networks.
Telus and BCE are doing massive job cuts in radio and TV segments. BCE even reduced its capital spending in the 5G infrastructure, while Telus maintained its capital spending. As May approaches, tensions are growing. A final decision on this regulation will determine the telcos’ next course of action.
What to expect from Telus stock in May
May could see a sharp jump in the telco stocks if the regulator scraps its decision. However, these stocks might fall further if the regulator continues its decision. If this regulation becomes permanent, the world will change for telcos. It will have a lasting impact on their cash flows.
A reduction in ROA could also impact their dividends in the long term. After all, the dividend comes from subscription money and giving a portion of their subscribers to competitors will only reduce their subscription money.
The fundamentals of Telus stock
If you look from the fundamental front, the two telcos are undergoing restructuring, reducing exposure to slow-growth segments and expanding their 5G capability. Telus has a dividend-payout ratio of 77% of free cash flow, slightly above its targeted range of 65-75%. However, the higher ratio is due to high leverage from the rising capital spending in infrastructure and high interest rates.
It is common practice for telcos to take on significant debt in technology upgrades, as the infrastructure pays for itself and dividends. Telus has increased its dividends for the last 20 years. And technology upgrades present an opportunity to accelerate dividend growth.
Any regulatory changes could affect Telus’s dividend-paying potential in the short term. However, the company may find a way to boost profit by monetizing the 5G opportunity. They might instead focus on less regulated and higher profit segments to boost profits.
In summary, every business has its ups and downs. A business thrives by finding a way to make money from the situation. However, such a change in the overall industry model takes time.
Is it a stock to buy and hold for the long term?
Telus is a fundamentally strong stock with long-term business demand, trading at its four-year low. This downtrend is an opportune time to buy the dividend stock. Every country needs a domestic telecommunication provider as the industry is critical for a nation’s economy and security. And since the regulator only wanted a pilot of the sharing model, there are chances it might eventually come into agreement with Telus and BCE.
If you keep buying Telus stock throughout the downturn and hold it for the long term, you could accumulate a sizeable passive income. Rarely do you see a fundamentally strong stock giving a 7% yield and a 7% dividend growth. While there is a risk of the regulator’s decision staying, the downside is limited as investors have already priced in the uncertainty. While adding the telcos to your portfolio, invest in other sectors to diversify your risk.
