August is loaded with dividend stock investment opportunities. Income investors will love the bloated 6.2% dividend yield on TELUS (TSX:T) stock and may wish to double up on a beaten-up Aecon Group (TSX:ARE) stock as the latter suffers potentially temporary setbacks on some legacy projects.
Doubling up simply involves buying more shares as your favourite dividend stock undergoes what you believe to be a temporary weakness. The strategy increases your yield, and lowers the cost basis on your long-term investment. The basic underlying assumption being that the dividend stock will maintain its payouts, or raise them, and recover in price during your holding period.
Aecon and TELUS stock prices have underperformed lately. Here’s why, long term, you may wish to buy the dips
By the dip on TELUS stock
Canadian telecoms giant TELUS’s stock price has slumped below pre-pandemic trading levels, and the dividend yield on the blue-chip stock has spiked to 6.2%, far above the COVID-19 crisis peak around 5.9%. Long-term income-oriented investors could take the opportunity and boost the passive income yield in their investment portfolios by simply doubling up on TELUS stock as it undergoes a temporary weakness.
TELUS stock has dropped by 9.9% so far this year. Shares slid 8.7% in July following a revised earnings guidance for 2023 released on July 13. The company expects to grow operating revenue by between 9.5% and 11.5% for 2023, and adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) within a range of 7% to 8% for the year. Prior guidance was for 11% to 14% revenue growth and a 9.5% to 11% surge in adjusted EBITDA this year.
Financial guidance is always provided in uncertainty. Its normal for companies to moderate their revenue and earnings projections as more factual data comes out. Meanwhile, TELUS’s business remains in growth mode; it just won’t grow as fast as management previously projected.
Continued revenue and earnings growth helps TELUS grow its free cash flow and sustain its generous dividend policy. The company has raised dividends at an average rate of 7.2% per annum over the most recent five years – rewarding its long-term shareholders with a 24.6% total return during the period.
Double up on Aecon Group stock?
Aecon Group is in steady growth mode as it wins new construction project tenders in 2023. Its revenue backlog increased by 8% year over year to $6.9 billion during the past quarter. However, Aecon stock fell more than 11% post a lukewarm second quarter earnings report (released July 26), and dividend investors bullish on Aecon’s cost recoveries may wish to double up on its 6.8% dividend yield right now.
Why did Aecon Group stock fall in July? Aecon signed on $2 billion (or 172.8% of its second quarter revenue) in new contract awards to its revenue backlog, but it had steep operating losses. Its quarterly profit of $28.2 million was largely driven by “other income” of $70.1 million, being gains on asset sales.
The company has incurred huge operating losses on four large long-term fixed-price projects that became loss leaders during the pandemic. Unforeseen site conditions, third party delays, and supply chain disruptions combined with material and labor cost inflation have rendered the four projects unprofitable.
Aecon lost $81.3 million on the contracts last quarter. The company believes clients are liable for the costs, and one project is under litigation. There’s a J-Factor (the judge’s decision) risk on the litigated project, and uncertainty over recoverability of losses. However, the windfalls on a litigation win and potential client reimbursements could be huge. There aren’t any guarantees, though.
Meanwhile, the remaining total backlog on the four projects has reduced to $699 million, or 10% of corporate backlog. The big projects are going away, and the last one may complete in 2025. Although they may leave scars, long-term investors may still reap capital gains and a bloated dividend yield as revenue grows and the four problem projects begin to turnaround.
