Open this photo in gallery:
Justin Tang/The Canadian Press
I would like to get your opinion of Telus Corp.’s dividend. The shares yield more than 8 per cent, which makes me nervous. Do you think the dividend is sustainable?
When a yield climbs into the high single digits, the market is telling you risk is elevated. While I don’t believe a cut is imminent, it’s clear that investors are increasingly concerned about the dividend’s long-term sustainability – or at least Telus’s ability to keep raising it.
The company’s own behaviour is also telling. For more than a decade, Telus T-T has raised its dividend twice a year, in May and November. It extended that streak on Nov. 7 when it released third-quarter results and announced a dividend increase of “4 per cent over the same period last year.”
However, on a sequential basis the increase was minuscule. The new quarterly dividend of 41.84 cents a share was just 0.5 per cent higher than the dividend of 41.63 cents declared the previous quarter, making it the smallest sequential bump since Telus launched its semi-annual dividend growth program in 2011 – excluding 2020, when it skipped the usual May increase during the pandemic. To me, this suggests Telus may be moving to a more conservative dividend strategy.
Still, even that tiny increase was too much for some analysts, who argue that Telus was already paying out more in dividends than is financially prudent, given its elevated debt levels and stated goal to deleverage its balance sheet.
Telus in talks to partner on data centres and AI, CFO says
Liam Gallagher, an analyst with Veritas Investment Research, called the latest increase “ill-advised.” In a research note, he said his “main concern with Telus is that it does not generate enough cash to cover its gross dividend obligation.”
According to Mr. Gallagher’s calculations, in the past year Telus generated about $1.6-billion of free cash flow but paid out $2.5-billion in gross dividends, for a payout ratio of about 150 per cent. The gross dividends figure includes dividends paid in shares instead of cash under Telus’s dividend reinvestment plan (DRIP), which currently offers a 2-per-cent discount. Mr. Gallagher’s definition of free cash flow is also more conservative than Telus’s, because he includes “working capital related accounts that the company excludes.”
Telus’s own dividend payout calculation paints a more optimistic picture. In its third-quarter management’s discussion and analysis, the company says its payout ratio – excluding dividends paid as shares under its DRIP – is 75 per cent of operating cash flow (less capital expenditures), or 106 per cent if the DRIP dividends are included.
Telus has been leaning heavily on the discounted DRIP, which covers roughly one-third of its common shares and saves about $800-million in cash annually, Mr. Gallagher said. However, the discounted DRIP dilutes existing shareholders and increases Telus’s dividend obligations as its share count rises.
The company is aiming to gradually reduce the DRIP discount and eliminate it entirely by the end of 2027, but doing so could be challenging given that many shareholders currently enrolled in the DRIP would presumably switch to cash dividends once the discount is gone, constraining the company’s financial flexibility.
“In our view, Telus is caught between a rock and a hard place, and we think a case can be made for cutting the dividend,” Mr. Gallagher said. In an interview, he said he doesn’t expect a dividend cut in the near term, because the company has several levers it can pull, including selling real estate, copper wire and other non-core assets and potentially monetizing its Telus Health business.
Still, based on concerns about Telus’s financial position, Mr. Gallagher downgraded the shares to “sell” from “reduce” and cut his intrinsic value estimate to $19 a share from $21.
Mr. Gallagher is the only analyst with a sell or equivalent recommendation on the shares. According to LSEG data, there are 10 holds and seven buys, with an average 12-month price target of $23. Telus closed down 1.16 per cent Friday at $20.38 on the Toronto Stock Exchange.
Officially, Telus says it still aims to raise its dividend twice a year, but at a reduced rate of 3 to 8 per cent annually from 2026 through 2028, down from its previous range of 7 to 10 per cent from 2023 through 2025. It’s worth noting, however, that Telus’s dividend guidance includes the caveat that “dividend decisions will continue to be subject to our Board’s assessment and the determination of our financial situation and outlook on a quarterly basis. There can be no assurance that we will maintain a dividend growth program through 2028.”
Moreover, in its 2024 annual information form, Telus said it takes into account several factors when determining its quarterly dividend rate, including “an ongoing assessment of free cash flow generation and financial indicators including leverage, dividend yield and payout ratio.”
In a statement provided to The Globe and Mail, Telus said the Veritas report “misrepresents our financial strength and dividend sustainability. The Veritas assessment also stands in stark contrast to analysis from all five major Canadian banks (RBC, TD, Scotiabank, BMO, and CIBC) who all have a buy rating on Telus, with analysts consistently highlighting Telus’s differentiated strategy, strong fundamentals, growth opportunities and dividend sustainability.”
Telus added: “We recognize the importance of dividend growth for our shareholders. Our intention is to continue growing the dividend, subject to the board’s ongoing approval and assessment. We have no intention of cutting the dividend and have recently announced our next three-year dividend growth covering 2026 through 2028.”
Selling BCE for the tax loss? Read this first
My take: Telus shareholders already enjoy a handsome yield of about 8.2 per cent – substantially higher than those of its competitors. Rogers Communications Inc. RCI.B-T, for instance, yields 3.7 per cent, and BCE Inc. BCE-T, which slashed its dividend by 56 per cent in May, yields 5.4 per cent.
With Telus’s yield already elevated, continuing to increase the dividend doesn’t strike me as the best use of capital, especially for a company that wants to strengthen its balance sheet as it navigates through an increasingly competitive and uncertain environment.
Finally, it’s worth pointing out that since BCE cut its dividend, the shares have posted a total return of 7.6 per cent. So, if Telus does eventually reduce its dividend, or even throttles back or pauses dividend increases, the stock won’t necessarily crater. The market could view it as a positive step for the company’s financial well-being.
With an already rich yield and a balance sheet under pressure, Telus may be wise to focus less on dividend growth and more on debt reduction and investment. Investors should view a pause or slowdown in dividend hikes not as a red flag, but as a sign of discipline.
Disclosure: The author owns Telus shares personally and in his model Yield Hog Dividend Growth Portfolio. View the portfolio online at tgam.ca/dividend-portfolio
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Editor’s note: This article has been corrected to state that Telus has an average 12-month price target of $23. A previous version incorrectly stated the target is $33.
