Telus (TSX:T) is down 20% in the past 12 months. Contrarian investors 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) focused on dividends.
Telus share price
Telus trades below $20 per share at the time of writing compared to $34 in 2022. The plunge in the stock caught many long-term investors by surprise.
Rising interest rates in 2022 and 2023 caused much of the damage. Telus, along with other communications firms, spends billions of dollars every year on network expansion and upgrades. The company uses debt to fund part of the capital program, so rising interest rates can drive up borrowing expenses and put a dent in cash that could otherwise be used for dividends or debt reduction.
In the past year price wars have cut into margins, and investors are concerned about the uncertain regulatory outlook. Telus also took a hit due to revenue declines at its Telus Digital subsidiary.
Risks
The Bank of Canada might not cut interest rates in 2025 as much or as quickly as previously expected. The state of the Canadian economy and the unemployment rate probably justify additional interest rate reductions, but the central bank can’t let the gap in rates between Canada and the U.S. get too big. South of the border, the economy remains robust, and inflation is proving to be sticky. If the U.S. Federal Reserve puts rate cuts on hold or decides to increase rates again this year to keep inflation from rebounding, the Bank of Canada will likely have to move at a slower pace on its rate-cut program, even if aggressive cuts are justified.
As such, communications and utility stocks could come under additional pressure.
A steep drop in immigration numbers, including fewer international students, will also have an impact on new customer additions in the Canadian communications industry in the next few years. Robust population growth has been positive for mobile service providers and the cuts to this source of new customers will leave a gap to be filled.
Opportunity
Telus delivered solid results through the first three quarters of 2024 despite the headwinds. The worst of the price wars in the Canadian mobile market might be over, and Telus Digital seems to be stabilizing. Investors received another dividend increase for 2025, so the board appears to be comfortable with the outlook for cash flow.
At the time of writing, Telus stock provides a dividend yield of 8.15%.
Should you buy now or wait?
Near-term volatility should be anticipated until there is more clarity on whether or not the Bank of Canada will continue to reduce interest rates. Regulatory uncertainty is also expected to continue until well after the 2025 election.
That being said, much of the bad news is likely priced into the stock at this point. The distribution should be safe, so contrarian investors focused on dividend income might want to start nibbling at this level and look to add on additional weakness.
