Telus Stock – a Screaming Buy With Declining Interest Rates?

ByDylan Callaghan Published On:

Telus stock has been a popular choice for Canadian investors seeking steady income and growth potential. However, it’s gotten thrashed over the years due to the rapid increase in interest rates putting significant pressure on current debt levels.

Is it still a buy today? I’ll dive into what I think in this piece.

Key Takeaways From This Article:

  • Telus offers a high dividend yield of 6.92%, appealing to income-seeking investors
  • The company is on the back end of a investing cycle for 5G and fibre optic networks to drive future growth
  • Cash flows aren’t covering the dividend at this point, but should be able to in 2025

Company Overview

Telus was formed in 1990 through the privatization of Alberta Government Telephones. In 1999, the company acquired BC Tel, expanding its presence in British Columbia. This merger created Western Canada’s largest telecommunications company.

Throughout the 2000s, Telus expanded rapidly. It launched wireless services across Canada, invested heavily in broadband infrastructure, and diversified into healthcare technology.

By 2010, Telus had become one of Canada’s “Big Three” telecom providers.

In recent years, Telus has focused on investments in 5G networks, Internet of Things (IoT) solutions, and artificial intelligence.

It has avoided the heavy media exposure that BCE and Rogers have, most of which BCE is selling off at this point in time. Instead, it has focused on higher margin, faster growing verticals.

The thesis for a buy

As one of Canada’s leading telecommunications companies, TELUS has built a reputation for being the strongest dividend grower in the space, and also just the fastest grower period.

The company currently offers a dividend yield of 6.92%, making it an attractive option for income-focused investors.

Telus has demonstrated resilience in a challenging economic environment, maintaining its position as a key player in the Canadian telecom sector. Rates went up, and they went up fast. The company looks to have weathered the storm, and should be able to come out of this unscathed, while major players like BCE are being forced to dump assets to pay down debt and maintain cash flows.

The company’s recent financial performance shows steady revenue growth and a commitment to expanding its network infrastructure. Eventually, the bottom line growth will return, and when it does, multiples could expand.

What else could expand is investments in 5G technology and fibre optic networks, which could drive future growth and shareholder value.

The company’s focus on innovation and customer service may provide a competitive edge in the evolving telecommunications landscape.

Telus International (Now Telus Digital) Disaster And Forward Opportunity

TELUS Digital is a key subsidiary of Telus Corporation. It provides digital customer experience and IT services to global clients. The company operates in over 25 countries and serves various industries, including tech, gaming, and financial services.

Telus International went public in 2021, raising significant capital for expansion. This move allowed Telus to maintain majority ownership while unlocking value for shareholders.

Telus Digital has been hit hard in a post-pandemic environment, making some untimely acquisitions and also seeing a significant slowdown due to rising rates and a sluggish economy.

With Telus spinning the company off at over $40 a share and Telus Digital now sitting at under $5 a share, I would not be surprised to see the company buy Telus Digital back.

In terms of reputation, this would not look good on Telus. Spinning the company out and buying it back 90% lower would be a kick in the gut for many shareholders. But to be honest, it’s the right move for the company.

How the company did in its recent earnings report

Telus reported a strong second quarter. Earnings per share of $0.25 came in well ahead of estimates, while revenue of $4.97B missed by just a few million.

It added a record 332,000 net new customers, including 262,000 mobile additions and 70,000 fixed-line additions. This represents a 13% increase in net additions compared to the previous year​.

The company’s free cash flow came in at $478M, which marks a 70%+ boost on a year-over-year basis. This is vital, as the company, along with other telecoms, is facing scrutiny when it comes to dividend coverage. The company’s cash flows are improving at a rate that should allow for dividend coverage in 2025, barring any setbacks.

But, lets dig into the dividend itself.

Dividend Safety

When considering Telus stock, you may wonder about the safety of its dividend. The company currently offers an attractive 6.74% dividend yield, which is significantly higher than historical averages.

However, it’s important to examine the company’s ability to sustain this payout.

Telus’ free cash flow generation has been tight recently, falling short of fully covering the dividend. This situation warrants some caution, no doubt, but it should improve.

Telus’ financial outlook is improving. Projections suggest the company’s cash flow should strengthen in the coming year, potentially providing better coverage for the dividend.

Telus has demonstrated a strong commitment to its dividend program, despite some relatively rough years in terms of cash flow generation due to capital expenditures. The company still aims to increase dividends semi-annually, targeting annual growth of 7-10% through 2025.

Remember, dividends are never guaranteed. But Telus’ track record and future plans suggest a continued focus on rewarding shareholders through dividend payments.

If we get to 2025 guidance and the company issues another shortfall in terms of free cash flow generation in relation to the dividend, then I will begin to get nervous.

Future Outlook

Telus shows promise for the coming years relative to analysts. The company’s average price target is C$24.58, indicating potential upside from its current price.

I feel if free cash flows improve dramatically, that price target is nowhere near the top for the company.

Although capital expenditures will continue to slow in the coming years, Telus will continue to invest heavily into infrastructure at a more prudent level, which will still allow the company’s earnings to grow.

Analysts forecast earnings growth of 23.5% annually over the next few years as interest expenses decline.

Would I Buy The Company Today?

Telus presents an intriguing investment opportunity in the Canadian telecommunications sector. The company’s stock has shown decent momentum in recent months. This is partly due to the Bank of Canada’s rate cuts.

I do believe there is upside from todays price, and I also do believe this will be one of the better performing Canadian telecom stocks moving forward in 2025 and beyond.

Although the dividend isn’t covered at this point, it is highly likely the company’s Fiscal 2025 free cash flows cover the dividend, which should provide some relief for many investors, both institutionally and retail.

The company is too cheap on a price to free cash flow perspective, despite all of the regulatory issues the industry faces at this point. It offers a reasonable risk/reward situation in my opinion.