Telus Inc (TSX:T) stock is one of Canada’s most popular high yield names. Sporting a 6.2% dividend yield, it cranks out enough passive income to be very intriguing to income-oriented investors. However, the stock has not performed well on a total return basis. Down in price over a full five-year period, it has done little for investors apart from paying a dividend.
Because Telus’ capital gains have been weak, the stock looks like a risky one. However, it is today fairly cheap, and it does have a high dividend yield. In this article, I will explore different reasons for buying, selling or holding T stock, ultimately concluding that the stock is a classic ‘hold.’
The case for buying
The case for buying T stock revolves around its valuation and dividend potential. T is a fairly cheap stock, trading at just 1.7 times sales, 2 times book value, and 7.8 times operating cash flow. These are not “bottom of the barrel” multiples, but they’re fairly modest by the standards of today’s stock market. Thanks to the AI craze, tech stocks have once again been bid up to extraordinarily steep valuations: the NASDAQ-100 Index has a P/E ratio of 32! Compared to that, Telus stock is cheap.
There is also of course the dividend. At today’s prices, T stock yields 6.2%, and the company’s management has a long history of raising the payout. If Telus’ management keeps up its long-term dividend growth track record, investors could end up sitting on a position with a double-digit yield-on-cost! However, Telus’ payout ratio (dividend divided by earnings) is currently above 100%, which indicates problems with dividend safety. For this reason, continued dividend hikes would probably not be the smartest move for T’s management to make. Holding the dividend steady would make more sense.
The case for selling
The case for selling Telus stock revolves around the company’s lacklustre growth. Over the last five years, T’s revenue has grown at a 7.4% CAGR, but the company’s earnings, assets, and free cash flow have all declined. That’s not a very good growth track record. To be fair, it’s much the same story with Telus’ competitors: the telco industry as a whole hasn’t been in a good place in recent years. But Telus’ recent performance has been worse than that of, say, Rogers Communications, so investors will want to scrutinize the stock carefully before buying it.
The case for holding
The case for holding Telus stock revolves around a combination of the factors already discussed. If you look at all the different things T stock has for and against it, it’s a pretty even matchup. The stock has a high yield, but an equally high payout ratio. It has high profit margins, but slow growth. It has a long history of dividend increases, but is poorly positioned to do further dividend hikes right now. Taking everything into account, there are few reasons to sell Telus stock right now, but there aren’t many compelling reasons to buy just yet either. Those who already hold Telus stock might wish to continue doing so, particularly if they need a lot of dependable dividend income. But those looking to deploy fresh capital today have better options available.
