After Canada’s inflation rate hit 2% in August 2024, matching the Bank of Canada’s target for the first time since 2021, investors are speculating about potentially amplified interest rate cuts. This environment could benefit heavily leveraged TSX dividend stocks that have struggled with high financing costs during the recent rate hike cycle. Among these, TELUS (TSX: T) stock stands out as a compelling investment opportunity.
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Why consider TELUS stock right now?
An investment in TELUS stock in September could set investors up for decades of lucrative passive income receipts every three months, potentially double their money in a decade, and introduce a defensive holding to a portfolio that could help better survive recessions.
Let’s look into the seven reasons you should buy the dividend aristocrat right now.
7 reasons to buy Telus stock in September
An attractive dividend yield: TELUS stock currently offers a robust 6.8% annual dividend yield, providing significant passive income potential. Reinvested diligently, juicy dividends from TELUS could help investors double their capital in just over 10.5 years if the stock price remains flat the entire time – the Rule of 72 predicts. Capital gains from a stock price recovery would be a bonus.
Strong recovery potential: TELUS stock has experienced a 33% decline from its pre-interest rate hike peak, suggesting room for capital appreciation as market conditions improve. A lower interest rate environment could help the telecom giant lower its financing costs, reduce discount rates on its dividends, and induce growing investor interest in the high-dividend stock as cash yields lose their shine.
Industry leadership: As a top player in the defensive telecommunications sector, TELUS stock offers potential portfolio stability across various economic conditions. Consumers will still communicate during tough economic times.
Strong infrastructure position: The company’s extensive fibre network creates a competitive moat in the Canadian market, supporting healthy operating margins despite significant market competition while sustained 5G network builds help TELUS contain rivals.
Recent innovation and growth initiatives: TELUS is exploring new revenue streams that could generate over $2 billion in gross earnings. First is a potential spin-out of its urban real estate portfolio built around a copper-wired business model that’s going obsolete. Second is a copper “mining venture” as the company decommissions copper infrastructure to sell the commodity into a hot electrification market.
Improving financials: Recent efforts to contain costs have helped retain respectable operating margins, while easing credit markets may reduce debt servicing expenses.
Artificial intelligence (AI) exposure: The company’s increased stake in a consolidated TELUS International enhances its potential earnings from global AI-related business lines.
Market context and outlook
The Canadian telecom market, while mature, continues to benefit from steady immigration, providing a consistent source of new customers. However, investors should note that overall revenue growth and fibre uptake rates have slowed in recent years.
TELUS currently pays out 83% of its free cash flow as dividends. While this ratio is higher than management’s desired 60% to 75% range, the company’s cost-cutting measures and potential new revenue streams could improve dividend sustainability and potentially fund future increases.
As interest rates potentially decrease, TELUS may have more financial flexibility to raise dividends at current rates of around 7% annually, make accretive reinvestments into the business at cheaper costs, accelerate debt repayments, and potentially repurchase its stock. The above moves may enhance shareholder returns.
3 considerations for TELUS stock investors
While TELUS stock presents an attractive opportunity, investors should be aware of potential regulatory risks regarding fibre services pricing to third-party distributors, a sustained high-interest regime that may continue to pressure its financial results, and the execution risks associated with its REIT ambitions and copper harvesting plans.
Investor takeaway
TELUS stock offers a compelling mix of high dividend yield, recovery potential, and exposure to both defensive and growth-oriented business segments. For investors seeking income and moderate growth in the current economic environment, TELUS warrants serious consideration as a core portfolio holding to buy in September.
