The share price of Telus (TSX:T) is down considerably over the past year. Contrarian investors who missed the rally off the 2020 market crash are wondering if Telus stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Telus overview
Telus is primarily a provider of mobile, internet, TV, and security subscription services to Canadian residential and commercial customers. The company also has subsidiaries that focus on IT or digital solutions in segments that are ripe for digital disruption.
Telus spun off its Telus International (TSX:TIXT) subsidiary in early 2021 at a market capitalization of $8.5 billion. Telus International provides IT services and multi-lingual call centre services to global clients. The economic slowdown has led to a drop in revenue at the IT service provider, and TIXT’s share price is down 70% over the past year as a result. This is having an impact on Telus, which still owns a significant part of TIXT.
Telus stock trades near $23 per share at the time of writing compared to more than $34 at the peak last year.
Telus has other growing subsidiaries that could expand to be major contributors to revenue and profit growth in the coming years. Telus Health is a provider of digital healthcare solutions for doctors, hospitals and insurance firms. It also provides solutions for corporations with employee benefit programs.
Telus Agriculture has expanded into consumer goods to provide digital solutions to farmers and the entire supply chain to make operations more efficient in the process of getting food from the supplier to store shelves.
Telus financials
Telus lowered its 2023 guidance due to the challenges being faced by Telus International and is cutting 6,000 positions to adjust to the current market environment. Despite the near-term headwinds, the company still expects to deliver consolidated operating revenue growth of 9.5-11.5% this year and growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) of 7-8%, supported by strong performances in the mobile and internet subscription businesses.
Restructuring costs are going to put a dent in free cash flow, which is now expected to be about $1.5 billion in 2023 compared to previous guidance of about $2 billion.
Dividends
Telus has increased the dividend annually for more than two decades, and investors should see the trend continue, even as the company faces some challenges. Annual dividend increases have historically been in the 7-10% range. At the time of writing, Telus stock provides a 6.3% dividend yield.
Is Telus a good stock to buy today?
Ongoing volatility is expected in the near term. Rate hikes by the Bank of Canada are driving up borrowing costs for businesses with large capital programs. Telus is spending about $2.6 billion this year. Higher interest rates are also making fixed-income alternatives more competitive with top dividend stocks.
That being said, Telus is probably oversold at this point and should be a solid pick for a buy-and-hold TFSA focused on passive income or for RRSP investors seeking attractive total returns. Any additional downside should be a good opportunity to add to the position. There is decent upside potential on the next rebound.
