Telus (TSX:T) and Enbridge (TSX:ENB) have fallen out of favour with investors over the past year. The drop in their share prices has investors wondering if one of these stocks is now undervalued and good to buy for a portfolio focused on passive income.
Telus
Telus trades for close to $26 per share at the time of writing. That’s down from $33 in April last year.
The pullback appears overdone considering the solid results Telus generated in 2022 and the positive guidance on revenue and free cash flow for 2023. Telus saw cash flow from operations increase 10% in 2022 and free cash flow rose 64% to nearly $1.3 billion. Management expects to deliver operating revenue growth of at least 11% in 2023 and free cash flow should be as high as $2 billion. Expansion of the 5G network gives Telus new opportunities to drive revenue growth.
The core mobile and wireline internet subscription businesses have revenue streams that should hold up well during a recession. TV subscription revenue would be at a risk of a drop, but most households have their TV service packaged with mobile and internet and people are likely to cut other discretionary spending before giving up their home entertainment.
Telus has two growing subsidiaries that investors should watch. Telus Health revenue rose 75% in 2022 to nearly $1 billion. This included four months of revenue from LifeWorks after the $2.3 billion acquisition of the firm that provides digital services to businesses with employee benefit plans.
Telus Agriculture and Consumer Goods saw revenue increase 24% to $354 million last year. The group provides digital solutions to make production and distribution of food more efficient.
Telus will probably raise the dividend by at least 7% per year through 2025. Investors who buy the stock at the current level can get a 5.65% dividend yield.
Enbridge
Enbridge is down to $49.50 at the time of writing compared to $59.50 at the peak last year. The company delivered solid results over the past 12 months and is targeting decent annual growth of 4% in earnings per share (EPS) and 3% in distributable cash flow (DCF) through 2025. Afterwards, EPS growth and DCF growth should improve by 5% per year.
Enbridge is working on a $17 billion capital program that is expected to help drive higher revenue. The company also has the financial firepower to make strategic acquisitions. Enbridge purchased an oil export terminal in Texas for US$3 billion in 2021. The company has also taken a 30% stake in a new liquified natural gas (LNG) facility being built in British Columbia.
Investors should see dividend growth of 3-5% per year over the medium term. At the time of writing, the stock provides a dividend yield of 7.2%.
Is one a better pick?
Telus and Enbridge pay attractive dividends that should continue to grow. Both stocks look oversold right now and deserve to be on your radar for a portfolio focused on dividend stocks.
If you only buy one, investors seeking high-yield passive income in the short term might want to make Enbridge the first choice. Otherwise, I would probably pick Telus today. The dividend growth will likely be better over the medium term, and the stock should offer better upside potential in the coming years.
