Amusing, but clearly apocryphal. The most obvious point against its veracity is that there would be no way for these 'demoralizing' objects to get into the hands of the enemy, unless Churchill was expecting Allied transport ships to be captured with all their cargo and taken to German-held ports.

On the practical side of things, there's really no reason to do this. I imagine this story grew out of the (real) practice of WWII infantry protecting their rifle barrels with service-issue condoms, which was only done in combat conditions to protect against fouling with moisture, mud, snow, or other debris. A heavy artillery piece leaving the factory (a triple-sized condom would really only be useful for an artillery piece on the order of 76mm or greater) would probably be packed in Cosmoline or a similar rust preventative and crated in a disassembled state- there would be no point in protecting one specific part of the gun (the end of the barrel), especially as the whole thing would have to be assembled and cleaned before it would be ready for use. Such a practice would also use large quantities of rubber, which was then a critical war resource and heavily rationed. It just wouldn't make sense.

Even if this had been done, and the oversized novelties had made their way into the hands of German soldiers, it's highly doubtful that there would have been any morale effect. For one, they're Germans- they don't speak English. For another, you'd have to be a gibbering idiot to believe that anyone had a penis thicker than their thigh and half a yard long.

I'm going to reluctantly call "urban myth" on this one too, because I've heard a similar but different version, in which the USSR requested 11" condoms to be included in the materiel sent to aid the Russians, and Churchill responded "Send them, but pack them in crates marked 'medium'".

I'd love it to be true, but like so many of Churchill's best lines, it probably wasn't Churchill's.