Telus share price
Telus is trading near $19 per share at the time of writing. The stock is up about 4% so far this year, driven by bargain hunters looking for a good dividend yield and a chance for decent capital gains.
However, investors who have spent the past four years scrambling to hit the bottom are wondering if things will be different this time.
Upside down
Some of the pain points that previously hurt Telus now appear to be in the rearview mirror. Rising interest rates in 2022 and 2023 caused the stock’s initial decline. Telus has a lot of debt on its balance sheet. The sharp increase in financing costs in such a short period drove up interest costs and increased the interest that buyers of new bonds wanted to receive on the sale of new debt. Higher debt burdens reduce profits and can mean that less money is available for benefits or debt reduction. The Bank of Canada cut interest rates in 2024 and 2025. This has helped ease pressure on companies with excessive debt.
Telus has also made progress in its efforts to monetize non-core assets to pay down its debt burden. Last year, the company sold a 49.9% stake in its wireless tower division for $1.26 billion. The company also sells copper stocks and non-essential real estate. In addition, Telus plans to monetize part of its Telus Health subsidiary, seeking up to $2 billion from a strategic partner. This would help alleviate balance sheet concerns.
Price wars between communications providers in 2024 reduced margins and drove up marketing costs for Telus and its peers as they battle for new mobile and internet customers. The race to the bottom on prices ended last year with limited offers during the traditional sales periods. Margins could improve through 2026 if subscription prices remain at current levels.
Another blow came from the decline in turnover at Telus Digital (Telus International). This led to Telus taking the subsidiary private from the stock exchange last year. The measure is expected to deliver $150 million in annualized cash synergies.
Risks
Borrowing costs remain high and any rise in inflation could prompt the Bank of Canada to raise rates again.
The decline in newcomers to Canada will also continue as the government tries to restore balance to the housing market. International students in particular were a good source of new subscribers for mobile and internet providers.
Dividend
Telus recently halted dividend growth in an attempt to stem the decline in its share price, after some analysts said payout growth might not be sustainable due to its debt load and challenging market conditions.
Management’s decision to suspend dividend increases appears to have put a floor under the share price. At the time of writing, investors can still achieve a dividend yield of 8.9%.
The bottom line
Telus isn’t out of the woods yet, but management is making progress in its turnaround. As long as debt levels continue to decline and earnings remain stable, the current dividend should be sustainable.
If you have a contrarian investing style, Telus deserves to be on your radar. Short-term volatility is expected, but you will be paid well to wait for the recovery. There is considerable upside potential if all goes according to plan.
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