Buy Telus for its dividend, this advisor says

Investors hoping for bigger gains this year from utility stocks like Telus (Telus Stock Quote, Chart, News TSX:T) have so far been disappointed. But you might actually be barking up the wrong tree, says Stan Wong, Director of Wealth Management at Scotia Wealth, who argues if you’re buying Telus, it’s for the dividend.

Communications and information technology company Telus, like its Canadian telco peers Rogers and BCE, has had a bit of a rough go in 2020. The stocks have yet to see a full recovery from the COVID-related market drop of earlier this year and in Telus’s case it’s been stuck around the $24-mark for months now, putting the year-to-date return at negative two per cent.

That’s in contrast to much of the Canadian tech landscape, which has done well this year. The S&P/TSX Capped Information Technology Index, for instance, is up 40 per cent for 2020 and that’s compared to the S&P/TSX Composite Index which is pretty much at even for 2020.

But investors shouldn’t worry about owning Telus, said Wong.

“If you look at telecom stocks both in Canada and the United States they have been somewhat stagnant on a relative basis. I think the investment market has really opted for more of the growth-oriented stocks, the Microsofts and the Facebooks and the Apples of the world, over the dividend payers which are the telecom stocks,” said Wong, speaking on BNN Bloomberg on Thursday.

“With that being said, I think the runway for growth in Canada for the wireless industry is still very, very strong,” Wong added.

Telus delivered its third quarter financials last week, having added 198,000 new wireless customers, compared to 193,000 net additions a year earlier. That included 111,000 mobile phone net adds, which was better than expected (analysts had estimated 84,000). Revenue was also above consensus, coming in at $3.98 billion compared to $3.70 billion a year earlier and better than the Street’s $3.82-billion estimate.

But profits came in a little lighter than expected at $356 million or $0.28 per share compared to $458 million or $0.39 per share a year ago and compared to analysts’ consensus guess at $0.31 per share.

Management emphasized in its quarterly commentary the company’s resiliency during a challenging time for telecom companies, with President and CEO Darren Entwistle saying, “TELUS once again achieved strong operational and financial results in the third quarter, characterized by excellent execution, resulting in industry-leading and record high customer growth of over 277,000 net new additions.”

“This accomplishment, realized against the backdrop of an unprecedented operating environment as a result of the global pandemic, reflects the effectiveness of our world-leading performance culture, underpinned by our highly engaged team,” he said.

Telus said it plans on delivering flat EBITDA growth for the year, as opposed to its guidance at the beginning of 2020 which called for seven or eight per cent growth. Still, the company said it expects free cash flow to come in at the lower end of its original call from February for between $1.4 and $1.7 billion.

Wong said, “One thing to keep in mind about TELUS is it’s more exposed than BCE and Rogers to Shaw’s move into the wireless space, so there’s a little bit of concern in that space. And, of course, there are secular trends on the negative side with television and landline phone subscriptions so that’s a bit of a headwind for TELUS and the economy, and the other incumbents,” he added.

As far as the dividend goes, at a five per cent yield Telus is between Rogers at 3.35 per cent and BCE at 5.8 per cent.

Wong said Telus’s dividend isn’t going anywhere, either.

“If you look at the valuation, Telus is trading at 9x enterprise value over EBITDA and that’s near ten-year highs,” Wong said. “But for an investor who’s simply looking for income and steady growth, you’re getting a five-per-cent dividend and that growth rate and dividend yield should increase monetarily over the next few years.”

“So, for an income investor I think Telus is a good stock. For a growth investor, you might want to look elsewhere,” Wong said.

Telus recently announced the $1.2-billion acquisition of Massachusetts-based artificial intelligence company Lionbridge AI which will become part of Telus International, the company’s digital customer experience business, which Telus plans to spin out as a public company.

“With the addition of Lionbridge AI, TELUS International will further progress its penetration of the fast-growing new economy services market that will enable our team to support important AI applications as demand for high-quality, multilingual data annotation continues to increase,” said Entwistle in a November 6 press release.