For the TFSA investors who want to keep the core of their TFSA portfolios reserved for the very best value ideas, it can make sense to consider some of the names that have spent the past couple of years tumbling into a bear market.
When it comes to the Canadian telecoms, there might be some pretty deep value to be had. Though, time will tell how shares ultimately bottom out and move on. Until now, it’s been quite tough to go bottom-fishing in the names.
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Value in the telecoms?
And while the valuation reset might be the new baseline for the big telecom firms, I do think that the names, such as BCE (TSX: BCE) and Telus (TSX: T), feel like similar deep-value plays that the banks were around three or so years ago.
It didn’t take long for the big Canadian banks to go from “dead money” to some of the most heated momentum leaders in the entire TSX Index. Whether the Big Three telecoms follow a similar script in the next two to three years, though, remains the big question.
For now, I’d encourage interested dip-buyers to mute their enthusiasm and set some realistic expectations, given the more modest growth roadmap ahead. And, of course, there’s a chance that the Bank of Canada could be looking at interest rate hikes again, especially if inflation keeps marching higher. Higher rates can be quite punishing for the companies that spend a lot on capital expenditures.
For the telecoms, that’s wireless and fibre infrastructure, which can add up to quite a bit. Either way, the telecoms have been reducing operating costs. And as lower spending becomes the new normal, perhaps there’s room to support a heftier dividend payout while ensuring enough is left over to power a good amount of growth (think single-digits).
Telus stock has that massive yield
For yield seekers, Telus looks to be, by far, the better bet. The yield sits at 9.6% after falling further into the abyss in the past year (down around 24% in the timespan). Was the bottom put in shares of T earlier in the year? We’ll have to wait and see. The stock goes for $17 and change, but could certainly revisit the depths of around $16 in as little as a few weeks, especially if investors are turning away from value and towards the growthier names out there.
As for the safety of the nearly 10%-yielding dividend, I’d rate it as somewhat safe. I’d say the chance of no cut is higher than a cut, at least over the next year. But the risk is, undoubtedly, more elevated than the likes of a BCE, which sports a yield closer to 5%. Are there warning signs?
The payout ratio might be stretched, but free cash flows are in a decent spot, and they could improve further. As CapEx comes down, costs get slashed, efficiency gains are unlocked by AI, and new projects power new cash flows, let’s just say Telus’ payout isn’t exactly a dividend cut just waiting to happen. If things go right, the yield could be an investor’s for locking in.
The bottom line
While BCE’s payout is markedly safer nowadays, I’d not be against owning Telus, especially if you think management can make other moves to sustain the hefty payout, which will eventually attract investor attention. In short, Telus stock, though riskier, is my preferred choice between the two.
