Telus (TSX:T) is down more than 20% in the past year. Contrarian investors seeking high dividend yields and a shot at decent capital gains are wondering if Telus stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Telus stock
Telus trades near $22.50 at the time of writing compared to $28 around this time last year. In the spring of 2022, the stock was as high as $34.
The slide in the share price over the past two years is largely due to rising interest rates in Canada. Telus uses debt as part of its funding strategy to finance its capital program, which will be about $2.6 billion this year. Higher borrowing costs put a dent in earnings and can reduce cash that is available for distributions to shareholders.
Telus also ran into some revenue issues last year at its Telus International subsidiary, which provides international companies with multi-lingual call centre and IT services. The group accounts for a relatively small part of overall earnings before interest, taxes, depreciation, and amortization (EBITDA) at Telus, so the market reaction to the challenges might have been overblown. Nevertheless, Telus reduced guidance in the summer of last year and cut about 6,000 positions at Telus and the subsidiary to adjust the business to the changing environment.
On the positive side, Telus still delivered strong 2023 results. Consolidated operating revenue increased by 9.4% in 2023 compared to the previous year. Adjusted EBITDA rose 7.6%. The situation at Telus International improved over the second half of the year with margins more in line with historical trends.
Telus Health, another subsidiary, delivered strong 2023 results with 11% EBITDA contribution growth. The division provides digital health services to global companies with employee health benefit programs.
In 2024, Telus says it expects overall consolidated operating revenue to rise by 2-4% and adjusted EBITDA growth should be 5.5-7.5%, supported by improved contributions from the core domestic mobile and internet services businesses and the subsidiary operations.
Dividend
Telus has a good track record of dividend growth. Investors have received an annual increase for more than 20 years. At the time of writing, Telus stock provides a 6.7% dividend yield.
Is Telus a buy today?
Investors should expect near-term volatility to continue until there is clear evidence the Bank of Canada is going to reduce interest rates. That being said, the drop in the share price is likely overdone at this point and the solid outlook for revenue and EBITDA in 2024 should support dividend growth heading into next year.
If you have some cash to put to work, this stock deserves to be on your radar.
