Telcos have been the talk in the investor community since these dividend stocks are trading near their lows. Among the three telcos, Telus (TSX:T) stock fell 34% from its April 2022 peak and is now trading close to its pandemic low at around $22.5. And it is not just Telus. BCE stock also fell 36% and is trading near $46.5, below its pandemic low.
Telus has built its reputation among dividend seekers by growing its dividend annually at a compounded annual growth rate (CAGR) of 40% in the last 19 years. Over the years, the growth rate has slowed. The management aims to increase its dividends by 7-10% every year till 2025. After that, they will determine the course for the next three years.
What happened in these two years that the stock of this telecom giant fell more than 34%?
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Why is this magnificent TSX dividend stock down?
The decline began in April 2022, when the Bank of Canada announced its first interest rate hike. And the word in the market was that a series of rate hikes would come as the bank’s priority was to slow inflation that had reached its 40-year high. On every interest rate hike, Telus stock fell as it has a long-term debt of $23.35 billion and less than $1 billion in cash. The telco has been spending billions of dollars on the fibre network. This level of capital spending needs significant long-term debt.
Telus issues new debentures to repay the old ones as they mature. This cycle works in Telus’s favour when interest rates fall, as it can issue new debentures at a lower rate. That explains the stock’s 61% jump from March 2020 to April 2022, when the bank cut the rate to 0.25%. But from April 2022 to now, the rate has surged to 5%, increasing Telus’s interest expense by a whopping 49.7% in 2023.
Despite rising interest expenses, Telus increased its free cash flow by expanding its network and adding more subscribers. However, its dividend-payout ratio increased to 77%, slightly above the 60-75% target range. It is not a problem as the ratio will return to the target range when interest rates fall.
When the cuts are announced, Telus stock could rally. However, regulatory headwinds should subside for the stock to reach its April 2022 peak.
Regulatory headwinds blocking the dividend stock’s rally
In Canada, telcos compete on the network front. This competition made it possible for Canadians to enjoy high-speed internet despite the country’s vast geography. With better infrastructure comes higher internet speed at lower prices. The recent data showed that Canada’s February consumer price index inflation slowed to 2.4% thanks to a 26.5% decrease in cell phone plans.
However, the telecom regulator is asking these facilities-based network operators, namely BCE and Telus, to provide reseller companies with access to the networks at mandated wholesale rates. This reduces the incentive for network operators to spend on building good quality network infrastructure. The decision has not yet come into force, and telcos are pressuring the government to scrap it. They have also reduced their capital spending on infrastructure, which should give them room to grow dividends.
However, this regulatory uncertainty could keep the stock prices of BCE and Telus under pressure.
Is Telus stock a buy-and-hold stock?
Telus stock is trading at a multi-year low, creating an opportune time to buy the dip. The company has the financial flexibility to sustain dividends and even grow them. It increased its first-quarter dividend by 5.4% and could announce another increase in June. Now is the time to lock in a 6.69% annual yield and book your spot in a stock price rally later this year.
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Telus is laying down the infrastructure for the next decade, where 5G will facilitate drone deliveries, autonomous cars, and smart cities. The network infrastructure it is building today will earn its subscriptions and other services revenue for the long term.
You could consider adding Telus stock to your Registered Retirement Savings Plan and give a boost to your passive-income portfolio.
