Telus (TSX:T) is down 17% in 2024 compared to a big gain in the TSX. Contrarian investors seeking high dividend yields 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 income and total returns.

Telus share price

Telus trades below $20 per share at the time of writing compared to around $24 at the beginning of the year. The stock was as high as $34 at one point in 2022.

The initial pullback in the back half of 2022 and through most of 2023 was largely due to rising interest rates. High inflation forced the Bank of Canada to raise interest rates aggressively. This drove up borrowing costs for households and businesses.

In the case of Telus, the company uses debt to fund part of its capital programs that include expansion of the 5G mobile network and installation of fibre optic lines to the premises of its customers. Elevated borrowing costs can drive up debt expenses. This reduces profits and cuts into cash that can be used to pay dividends or reduce debt.

The Bank of Canada signalled it was done raising interest rates late last year and began to reduce rates in the summer of 2024. This led to a rebound in many utility sector stocks, but Telus and its communications industry peers have not joined the party.

The reason lies in the specific challenges for the telecom industry. Price wars for mobile and internet subscribers have put pressure on margins. Regulatory uncertainty still hangs over the group. In addition, Telus had to reduce its guidance due to weaker revenue at its Telus Digital subsidiary, which provides a multilingual call centre and IT services to global clients.

Opportunity

Telus reported decent third-quarter (Q3) 2024 results. Net customer additions in the quarter came in at 130,000 for the mobile group and 34,000 for internet subscribers. Mobile postpaid churn remained below 1%. Consolidated operating revenue increased by 1.8% compared to Q3 2023.

Telus Digital's results appear to be stabilizing when compared to Q2 2024. The company is investing in artificial intelligence (AI) solutions that should help drive a rebound for the division. At the same time, the parent company can take advantage of AI solutions to drive improved efficiency, reduce costs, and provide better and customized client services.

Telus Health, another subsidiary, continues to grow. Revenue increased 4% compared to the same period last year. A third subsidiary, Telus Agriculture and Consumer Goods, saw revenue increase by 20%. The newer businesses have the potential to become significant contributors to growth in the coming years to diversify the overall revenue stream.

Dividends

Telus recently announced another dividend increase, representing a 7% year-over-year hike in the size of the distribution. This is the 27th time the board has increased the payout since 2011. Going back 20 years, Telus has paid out $21 billion in dividends, or roughly $18 per share.

Investors who buy Telus stock at the current level can pick up a dividend yield of 8.1%.

The bottom line on Telus stock

Telus trades close to its 12-month low. Near-term volatility should be expected until there is evidence that the price wars in the industry have run their course and that the various players start to refocus on margins. That being said, the dividend should be safe, so you get paid well to ride out the turbulence.

If you have some money to put to work in a contrarian portfolio focused on dividend income, this stock deserves to be on your radar.