Telus (TSX:T) stock broke quite a few hearts this past week, with the firm reporting tough second-quarter earnings results alongside a perhaps less-surprising, but still painful, 55% dividend reduction. Indeed, we all knew that a dividend cut was bound to happen, especially with the dividend yield flirting with the 12% zone.
Now that the cut is in the books, I think that Canadian passive-income investors can now focus on the new, freshly cut, and far more sustainable dividend, which yields a still very respectable 5.45% at the time of this writing, putting it close to its peer BCE (TSX:BCE), which ripped the band-aid off (the dividend cut) far earlier. Whether Telus was targeting that same 5.5% yield zone remains the big question.
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The only thing that hurt more than the quarter was the dividend cut
Certainly, there was room to cut by less, but, for the most part, I think it was the right call, even though investors are sure to take a while to get over the move. At less than $14 per share, I see deep value to be had in the ailing telecom firm. Now that it has greater financial flexibility, I think it can accelerate its comeback plan by a bit.
With most metrics slightly in the red and new guidance that’s not being taken well by investors in the slightest, questions linger as to whether investors can still depend on this former market darling. Of course, with low expectations and more financial flexibility comes greater potential to start surprising to the upside for a change.
The stock has already lost just north of 60% of its value from peak levels, and while that won’t prevent the name from imploding to 66% or even 70% from peak to trough, I think that analysts are becoming a tad overly bearish on the name. Yes, the results and outlook were not at all good. The dividend reduction was just a slap in the face in what was a horrid quarter that gave little for investors to get behind. It’s not just telecom that’s feeling the heat; Telus Digital was also on the ropes.
Turning the tides one step at a time
As the firm reduces its debt load while looking to invest in key areas to reduce operating expenses, I do think there is hope in sight for a firm that’s been on its way down for more than four years now. It’s been a real test of investor patience, and, sadly, now that the dividend yield is below 6%, my guess is that income-oriented investors don’t have that big a main attraction to convince them to stick around as the management team does their best to turn things around.
It won’t be an easy transition, but now that the uncertainties surrounding the dividend are gone, I think that it’s time to start viewing the name as a comeback play fit for deep-value seekers. In terms of rebuilding profitability, I think fixing the balance sheet is a smart first move. Then, the firm can embrace AI to cut costs and pass more value to users.
Indeed, it’s a race to the bottom in telecom, and to turn its metrics around, Telus needs to spend less on network expansion and marketing and more on sweet deals for Canadian consumers who already have stretched budgets. Add AI data centre builds into the equation, and I think there’s a way out for Telus, even though it’s sure to be a long road back to the top.
