Should You Buy Telus or TD Stock on the Pullback?

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Telus (TSX:T) and TD Bank (TSX:TD) are down considerably this year. Contrarian investors who missed the rally off the 2020 market crash are wondering if Telus stock or TD stock are now undervalued and good to buy for a self-directed portfolio targeting passive income and total returns.

Telus

Telus trades near $22 per share at the time of writing, down about 15% for the year and off more than 35% from the 2022 high of around $34.

The steep decline is largely due to soaring interest rates. Telus uses debt as part of its funding for capital projects. As borrowing costs increase, there can be a negative impact on profits and cash available for distributions to shareholders. In addition, rising interest rates lead to higher returns on alternative investments, such as Guaranteed Investment Certificates (GICs). Money might flow out of dividend stocks like Telus until the yield gets to a point where the premium over GICs appears to be worth the added risk.

Telus is also seeing some weakness in its Telus International subsidiary. The business provides multi-lingual call centre and IT services to global customers. Challenging macroeconomic conditions have led to a large drop in revenue at Telus International. This forced Telus to reduce its overall guidance for 2023, but the company still expects to generate consolidated operating growth of at least 9.5%, supported by the core mobile and internet subscription businesses that should hold up well during an economic downturn.

Telus is probably oversold at this point, considering the quality and stability of the major components of the revenue stream. Investors who buy Telus at the current level can get a 6.5% dividend yield. Telus has increased the dividend annually for more than two decades.

TD Bank

TD stock is down about 12% in 2023 and is off roughly 30% from the 2022 high. The big decline is due to rising interest rates, as well, but for different reasons.

Banks normally benefit when interest rates go up because they can generate better net interest margins. Markets, however, are concerned that the sharp rise in interest rates over such a short timeframe is going to trigger a severe recession and a spike in unemployment. This could lead to a wave of loan defaults.

The Bank of Canada and the U.S. Federal Reserve are increasing interest rates to try to cool off the economy to get inflation under control. Investors appear to be of the opinion that they have pushed rates too high and will keep them elevated for too long.

How things will turn out is anyone’s guess. Economists are broadly of the view that a short and mild recession is likely in 2024 or 2025. Assuming that scenario materializes, the drop in the TD’s share price is probably overdone.

TD remains very profitable, even in the current conditions, and has a large capital cushion to ride out some challenging times. Investors who buy the stock at the current price can get a 5% dividend yield.

Is one a better buy?

Telus and TD pay attractive dividends that should continue to grow. Investors seeking passive income might want to make Telus the first choice for the higher yield. Those focused more on total returns should probably consider TD at this level as well.

The post Should You Buy Telus or TD Stock on the Pullback? appeared first on The Motley Fool Canada.

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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.