Written by Andrew Walker at The Motley Fool Canada
Telus (TSX:T) and BCE (TSX:BCE) are trading significantly below their 12-month highs. Contrarian investors who missed the rally off the market crash in 2020 are wondering if Telus stock or BCE stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends.
Impact of rate hikes
Rising interest rates are responsible for much of the pullback in the share prices of both Telus and BCE. The companies use debt as part of their funding strategies to pay for capital programs. Higher borrowing costs can reduce profits and cut into cash flow available for distributions.
On the investor side, people normally own Telus and BCE for their reliable and generous dividends. The surge in rates paid on Guaranteed Investment Certificates, however, might have led to a shift in funds from the stocks, which come with risk, to the safer alternatives.
Rate hikes are not the only story. Telus and BCE also have some company-specific issues that have also kept investors on the sidelines.
Telus trades near $23 per share at the time of writing. The stock was above $34 at the high point in 2022.
The company avoided investing billions on media assets over the past decade and has instead focused on building subsidiary businesses that focus on technology. Telus International (TSX:TIXT), which Telus spun off through an initial public offering in 2021, provides IT and multi-lingual call centre services to global clients. The subsidiary is having a rough year, and the disappointing revenue numbers at TIXT forced Telus to reduce its 2023 guidance and cut staff by 6,000.
Overall, however, Telus still expects consolidated revenue and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to grow this year.
Telus is expanding its Telus Health business, including the $2.3 billion takeover of LifeWorks last year. The addition of LifeWorks makes Telus Health a global provider of digital services to businesses with employee benefit programs.
Telus Agriculture and Consumer Goods uses digital solutions to help make the entire food supply chain more efficient from producers all the way to store shelves.
These two subsidiaries have the potential to drive solid long-term revenue growth.
Telus has historically raised its dividend by 7-10% per year. Near-term increases might be lower given the current headwinds, but payout growth should continue. The board has increased the dividend annually for more than 20 years. At the current share price, investors can get a 6.3% dividend yield.
BCE trades for close to $54.50 at the time of writing. The stock was above $65 in May and topped $73 at the peak last year. The extended slide in recent months could be due to weakness in the media group, along with the impact of rate hikes. BCE owns a television network, specialty channels, radio stations, interests in sports teams, and related digital platforms.
Advertisers are cutting marketing budgets and shifting spending to social media. This is putting a pinch on revenues in BCE’s media group and has led to staff cuts this year in the division.
That being said, BCE still expects total revenue and free cash flow to rise in 2023 compared to 2022, supported by the mobile and internet businesses.
BCE has increased its dividend by at least 5% in each of the past 15 years. Investors can currently get a 7% dividend yield from the stock.
Is one a better pick?
BCE offers the higher yield right now, but Telus typically increases the dividend by a higher percentage each year. Both stocks look oversold today and should start to recover as soon as interest rates begin to decline. At their current prices, I would probably split a new investment between the two stocks.
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The Motley Fool recommends TELUS and Telus International. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus and BCE.