Telus (TSX: T) is down about 40% from its 2022 high. 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) portfolio focused on high-yield dividends.
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Telus stock
Telus trades near $20 per share at the time of writing. The stock was above $34 about three years ago before going into a steady decline that saw the share price dip as low as $19 at the end of last year.
The damage in 2022 and 2023 was largely due to rising interest rates. Telus and other communications firms use significant debt to cover the cost of building and upgrading wireless and wireline network infrastructure. The Bank of Canada raised interest rates aggressively over a short period of time. This pushed up debt expenses on variable-rate loans and made it more expensive to borrow additional funds. Higher debt expenses reduce income and can cut into cash that is available for distribution to shareholders.
The Bank of Canada started to cut interest rates in the second half of last year. This triggered a rally in other sectors that are sensitive to interest rates, but Telus and its peers have not joined the party. This is due to industry-specific issues. Price wars among mobile and internet providers are squeezing margins. Cuts to immigration levels are also going to impact new subscriber numbers. At the same time, there is regulatory uncertainty for the telecoms as the country heads into an election.
Outlook
Telus reported decent 2024 results despite the challenging environment. The TTech division, which includes the wireless and internet services operation, along with the Telus Health and Telus Agriculture and Consumer Goods businesses, delivered adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 5.5% for the year. The Telus Digital subsidiary, which provides multilingual call centre and IT services to international clients, had a rough ride.
For 2025, Telus expects TTech operating revenue to grow 2% to 4%. Consolidated free cash flow is targeted at $2.15 billion.
Price wars in the mobile space appear to have eased with most carriers now offering more data rather than cutting prices as much as they were last year. That could change, however, as the battle for fewer students and other new arrivals to the country heats up. At the same time, a recession caused by a trade war would put pressure on revenue from corporate clients as they freeze headcount or start to trim staff.
Dividend
Telus raised its dividend for 2025. At the current share price, the dividend yield is nearly 8%. Investors should prepare for a potential halt to dividend increases due to the economic conditions and rumblings among analysts that debt is too high. With the yield at this level, the market is near the point of anticipating a cut.
Should you buy now?
Income investors who think the dividend is safe might want to start nibbling at this level to take advantage of the high yield. Investors hoping for a big rebound in the share price, however, probably need to be patient. Stiff competition for fewer new mobile and internet customers could put pressure on anticipated revenue and profit growth this year. Any revision of guidance to the downside would be negative for the stock.
