The Canadian telecom scene continued to descend deeper into the abyss in the first half of 2024. And though the TSX Index is in a good place to start the second half, investors should exercise extra caution when attempting to catch a falling knife within a distressed industry such as telecom. Undoubtedly, a seemingly “cheap” stock can always get a heck of a lot cheaper if circumstances take a turn for the worse.
Dip-buyers of Telus (TSX:T) and some of the other Big Three plays may know this by experience. Either way, as shares of Telus go down, the dividend yield only stands to swell further. At the time of writing, Telus stock boasts a yield of 7.4%, even after Monday’s solid 1% gain.
Telus stock: Could a big recovery be closer than we think?
The big question is whether the telecom scene has what it takes to sustain a move out of the rut in the coming months and quarters. Of course, lower interest rates could be on the way. And as capital-intensive firms with a good amount of debt sitting on the balance sheet, any such relief on rates could be a potential driver of the share price, at least from these ominous depths.
With Telus stock going for just over $21 per share, the trailing price-to-earnings (P/E) ratio remains rather hefty at 40.46 times. So much for a cheap stock!
I believe it makes more sense to view a telecom play like Telus from a forward-looking perspective. When checking out Telus stock’s forward P/E, which sits at 20.83 times, the stock looks pretty reasonably priced. It’s not a dirt-cheap bargain, but it’s a very fair price to pay for a stock that sports one of the most bountiful yields out there. Additionally, there could be considerable upside if the rate cuts keep coming in.
Telus stock doesn’t even have the highest yield in telecom!
Of course, you’d be reaching a bit of yield by going with Telus stock after its 40% drop. However, you could certainly reach further with BCE (TSX:BCE), the yield-heaviest of the Big Three Canadian telecoms right now, with a towering yield of 9.26%. And, no, that’s not a typo; the blue-chip behemoth now yields more than 9%!
Indeed, if BCE stock continues dropping without a dividend cut announcement, the 10% yield mark could still be breached. Unlike BCE, which has been cutting many staff of late, I view Telus as a slightly better growth play. Of course, asking for growth when you’re already getting a yield north of 7% seems like a huge ask.
The bull scenario for telecom stocks
That said, if rates fall faster than expected and the firm can effectively navigate macro headwinds, Telus stock may be in for a bull-case scenario that sees the stock surge higher while the dividend stays on strong footing. Between a dividend reduction and a raise, I’d have to say the latter is likeliest, even in the face of harsh headwinds.
Should more Bank of Canada rate cuts be on the table in the second half, I do see the broader telecom stocks marching steadily higher. But unless there’s a surprising dovish tilt (highly unlikely, in my opinion), such a rally may be mild in nature. Either way, the dividend is the main attraction, not the rebound potential.
