Canada’s telecom stocks are typically regarded among the best defensive options for investors. In recent years, however, that view has been challenged by stubborn interest rates, high debt and investors cycling out of telecoms. That’s left this one Canadian stock down 22%, making it an opportunity for investors.
That stock is Telus (TSX:T), which, despite that dip, remains a solid long-term option despite the current pessimism around telecoms. Specifically, the stock still offers its defensive and increasingly essential services backed by recurring revenue.
But let’s first look at why this Canadian stock trades down right now.
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Why Telus stock is down 22%
The decline in Telus shares is tied largely to a slew of broader pressures rather than any one specific company failure. The higher interest rates that we saw over the past few years have weighed on telecom valuations across the board. Telecoms like Telus are capital-intensive businesses that require taking on debt to fund improvements and infrastructure upgrades.
Those higher rates made those necessary infrastructure upgrades considerably more expensive. It’s worth noting at this point that this isn’t limited to Telus as one Canadian stock; all of Canada’s big telecoms are facing this same challenge.
The rise in interest rates also pushed investors away from defensive options like telecoms toward higher-growth names. Again, this rotation wasn’t limited to just Telus but rather the entire Canadian telecom landscape.
And while interest rates remained high, that led to slowing subscriber growth across all of the big telecoms. This created a perception of stagnation, despite demand remaining steady.
Those challenges pressure free cash flow and result in the stock appearing less appealing to some investors. The end result on this Canadian stock was the notable pullback of 22%.
Despite challenges, Telus is still a long-term option
Telus continues to operate one of the strongest wireless and fibre networks in Canada despite the challenges facing the sector. The company’s long‑term revenue growth has been consistent.
Even better, those services are increasingly essential in nature to both households and businesses. That’s especially true for the wireless and internet segments.
Outside of Telus’ core subscription services, the company also has a growing number of diversified business lines. These segments provide a complementary revenue stream and help to offset some of the slowdowns witnessed in other areas. This includes both Telus Health and Telus International, both of which cater to niche segments of the market.
Long‑term investors often look for moments when high‑quality companies fall out of favour temporarily. Telus fits that profile today. The market’s reaction to near‑term challenges may be overstated, creating an opportunity for those willing to take a multi‑year view. As the company continues expanding its network, growing its digital health footprint, and strengthening its service offerings, the potential for recovery becomes more compelling.
Let’s talk about dividends
One of the main reasons for the popularity of Canada’s telecoms, and more specifically Telus, can be traced back to its quarterly dividend. Telus has built a reputation over the past two decades to become one of Canada’s most reliable dividend payers.
As a result of those recent challenges, Telus froze its dividend growth program and began winding down its DRIP program. In doing so, Telus can maintain its current dividend and focus on improving its balance sheet and reducing debt.
As of the time of writing, Telus offers a yield of 9.8%, making it one of the highest-paying yields on the market. At that rate, even a $5,000 investment in the stock will result in more than a half-dozen shares generated from reinvestments alone each quarter.
For longer-term investors, this represents significant compounding potential that can quickly snowball into an income machine.
Final thoughts for long-term investors
Telus remains a stable, essential service provider with a long history of delivering to investors. If anything, the recent decline has created an opportunity for long-term investors to capitalize on. As interest rates continue to stabilize and then drop, Telus is positioned to benefit from its stronger free cash flow position.
In my opinion, Telus is a great long-term holding that should be a small position in any well-diversified portfolio.
Buy it, hold it, and watch your portfolio (and income) grow.
