Telus (TSX:T) is down about 12% in 2024. Contrarian investors focused on dividends 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) focused on dividend income and total returns.

Telus stock price

Telus trades near $21 per share at the time of writing. The stock is above the 12-month low of around $20 but is way off the $34 it reached in 2022 before the Bank of Canada began to aggressively raise interest rates.

Higher interest rates drove up borrowing expenses over the past two years. Communications companies like Telus spend billions of dollars expanding and upgrading their wireless and wireline networks and using debt to fund part of the capital program. Higher interest expenses reduce profits and can cut into cash that is available for distributions or debt reduction.

Telus has also faced challenges in both its Telus Digital (TSX:TIXT) subsidiary and the core Canadian business. Telus Digital provides multi-lingual call centre and IT services to global companies. A sharp drop in revenue at Telus Digital forced Telus to reduce guidance last year and contributed to the reduction of 6,000 positions across the broader business. TIXT is down more than 50% on the TSX in 2024.

In the domestic market, Telus is dealing with price wars and regulatory uncertainty. In addition, the reduction in immigration and foreign student numbers in the next few years will likely slow the growth of new mobile and internet accounts.

Opportunity?

Battles to win customers could continue into next year, but the communications companies will eventually refocus on boosting margins. Telus is holding its own in the current environment. The company reported 130,000 net mobile customer additions in the third quarter (Q3) of 2024. Results at Telus Digital stabilized in the quarter compared to Q2 2024, so the worst might be over for that division. Telus Health, another subsidiary, continues to grow and could become a meaningful contributor to overall growth in the coming years.

Telus is also monetizing its real estate portfolio to unlock value and capital.

Dividend

Telus has increased its dividends annually for more than 20 years. The board raised the distribution by a total of 7% in 2024. This suggests the management team is comfortable with the earnings outlook over the medium term, even in the current challenging market conditions.

Investors who buy Telus stock at the current share price can get a dividend yield of 7.7%.

Risks

Inflation started to creep up again in the past couple of months. This could force the Bank of Canada to slow down its pace of rate cuts, even if the economy softens. Bond yields remain elevated, so borrowing money is still expensive for corporations that need to refinance debt.

In Canada, unemployment jumped to 6.8% in November. If the economy slips into a recession and job losses rise, people will be less likely to upgrade to new phones or add new services to their communications plans. This could put added pressure on Telus and its peers in the next year.

Is Telus a buy?

Additional weakness is possible in the near term. In fact, it wouldn't be a surprise to see Telus retest the 12-month low if the broader market goes into a correction. That being said, most of the negative outlook should already be priced into the stock.

Contrarian investors searching for high-yield dividends might consider a small position at this level and look to add on additional weakness. The dividend should be safe, so you get paid well to wait for a recovery.