The TSX Composite market rebounded as the Bank of Canada announced its second 25 basis point interest rate cut. More such rate cuts are expected in the coming months. This could be a turning point for Canadian companies with heavy debt. A 50-basis point decrease can save companies millions in interest expenses. A magnificent dividend stock is trading at a 30% discount from its average trading price. And you don’t want to miss it as you can lock in a 7% dividend yield.
A magnificent dividend stock trading at a 30% discount
Telus Corporation (TSX: T) stock was in a downtrend for over two years for three reasons.
Aggressive promotional activity
Canada’s telco Telus got into competitive pricing with BCE in the second quarter of 2023. It added 376,000 gross mobile phone subscriptions but lost 1.3% to the rival, resulting in a net addition of 45,000. The price war reduced its average revenue per user by 1.8% to $59.31 and operating revenue by 1.2% in the first quarter.
Declining revenue was reflected in Telus’ stock price.
Rising debt levels
While aggressive promotion activity affected Telus’ revenue, rising interest rates and higher debt increased its interest expense by $74 million in the first quarter. Its average long-term debt maturity reduced to 10.7 years (from 11.8 years a year ago). The weighted average cost of debt increased to 4.4% (from 4.2%). The company raised debt to fund capital spending and repay older debt.
Rising debt and falling profit increased its net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) to 3.8 times, beyond its target range of 2.2 to 2.7 times. As debt increased, the company increased its liquidity to over $4.2 billion from its minimum requirement of $1 billion to provide for emergencies.
Higher dividend payout ratio
The interest expense and lower revenue also reduced free cash flow and increased its dividend payout ratio to 91%, above the target range of 60% to 75%. Telus has financing ratios above its target range, hinting at stretched financial flexibility. If it stretches to a point, the management might have to rethink the plan to grow its dividend by 7-10% till 2025. The management could stop this growth if the situation demands it.
All these elements have been pulling down Telus stock and putting it at a discount.
What changed for this magnificent dividend stock in June?
In June, the Bank of Canada’s interest rate cut began, raising hopes for reducing interest expense. Telus and BCE also stopped their aggressive promotion activity and increased the price of their base plan by 5%. It could have a positive impact on their revenue and profits.
Moreover, Telus has been improving its mobile and broadband services to tap the 5G potential to connect several devices simultaneously to the network, bringing artificial intelligence (AI) to the edge. It has partnered with Ericsson to deploy the next generation of 5G edge computing from autonomous vehicles to enhancing public safety and healthcare technologies.
Telus’ partnership with Cisco Systems will focus on connected cars and other internet-of-things use cases. It is building Canada’s first commercial virtualized and open radio access network (RAN) with Samsung. The telco is working with Amazon Web Services (AWS) and Samsung to evolve the roaming architecture.
All these efforts are in the right direction to tap the 5G opportunity, which is much bigger than 4G. This technological upgrade will strain its finances in the short term, but Telus is well-placed to realize the full potential of 5G.
Why you shouldn’t miss this 30% dip
Telus is at a transition point. The worst is over for the telco. The short-term headwinds have created an opportunity to hop onto the recovery rally and the long-term growth of 5G while locking in a 7% yield. Even if the company slows or pauses dividend growth, it will accelerate growth in good times. It is a stock to buy and hold for the long term.
