9% Yield: Is Telus’s Dividend Safe?

Telus announced a major change in its dividend strategy: It is stopping regular increases in its dividend while maintaining the current rate. What does the news mean for Telus investors? Motley Fool Canada breaks it down in this short video.

Prefer to read? There’s a transcript below.

Nick Sciple: I’m Motley Fool Canada Senior Analyst Nick Sciple, and this is The Five-Minute Major, here to make you a smarter investor in about five minutes. Today, we’re discussing Canadian telecom giant Telus’s recent strategy update, including management’s decision to pause their dividend growth strategy.

My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me.

Iain Butler: Great to be here, Nick.

What’s going on with Telus’s dividend?

Nick: So as I teed off with in the intro, Telus dropped big news this week around its plans for its dividend and future growth outlook for its business. What does all this news mean for shareholders?

Iain: Yes, indeed. So, eyebrows have sort of been raised over Telus’s dividend, as illustrated by the more than 9% yield at which the stock has been trading in recent weeks. And this week, the company attempted to calm the market down with some announced alterations.

So, the dividend remains as is, which is great news. However, the company’s pledge to continually increase that dividend is now off the table. They’ve just deemed it sort of ridiculous to need to continue upping the dividend when the stock already yields 9%. In addition, the Dividend Reinvestment Plan, or DRIP, short term, is going to change as well. For those that don’t know, a DRIP is when shareholders elect to receive shares at a discount to the market price in lieu of a cash dividend payment.

But with shares of Telus trading as they are, this discount is going to be stepped down to nothing over the next 6 to 12 months.

Telus’s free cash flow targets

Management also released free cash flow targets (helping to calm the market down) for the next three years to provide further confidence that the company is indeed able to support the current dividend. Free cash flow is expected to grow at a 10% annualized rate between 2026 and 2028, with $2.4 billion, or $1.56 per share, in free cash flow and an annual dividend commitment of $1.67 in 2026. The payout ratio will drop below 100% by 2027,and should continue to decline from there. And I think for 2026, when there’s a bit of a shortfall, the company has the financial flexibility to cover that temporary gap.

Those are the details.

Nick: The big headline news there being Telus, a company that had increased its dividend payout on a semi-annual basis, going back for over a decade now, back to the early 2010s. Now, those dividend increases are going away. Maybe some increases to come in the future, but certainly not going to be on a regularly scheduled program that investors have gotten used to. So with this change in the dividend policy, do you view this as a red flag for the business, or if you’re a long-term shareholder, could there be a silver lining here?

What the dividend changes mean for Telus investors

Iain: I think what we’ve actually been left with is somewhat of a conundrum, and this is causing my brain to hurt, frankly. Historically, Canada’s big three telco companies, that’s Telus, Rogers, and BCE, have traded pretty closely together in terms of valuation. Today, though, Telus’s dividend yield of about 9% looks absolutely enormous relative to the 3.8% yield offered by Rogers and BCE’s 5.4% yield.

And if indeed Telus’s dividend is sustainable, which management is telling us that it is, that 9% yield should look a lot more like the yields offered by BCE and Rogers. For that to happen, though, the stock would have to appreciate to more than $32 per share from the current $18.73 as we record this, for Telus to offer that 5%ish yield with the current dividend payment.

That’s well and good, and what a great stock move that would be. Problem is, if Telus were to be priced at $32, its enterprise value to EBITDA ratio would be about 16.4 times, and that is up from the current 11.4 times. 11.4 times is already a 40% premium to what BCE and Rogers trade at.

And 16.4 times would represent more like a 100% premium. Historically, over the past 10 years, Telus has traded for an average premium of about 18%.

So something’s gotta give here. Telus should not offer the yield that it does, over its telecom peers.

However, if it were to trade in line on the yield front, the stock is going to look ridiculously overvalued, again, relative to its peers. So, the most obvious solution for me is for that EV to EBITDA multiple to come down. To do so, Telus could reduce its debt. That would bring the enterprise value lower. This will not happen overnight. The debt is sizable, and again, they’re gonna have a gap on free cash flow in 2026 relative to the dividend. So, good chance this yield spread isn’t going to disappear anytime soon, but when that ratio declines below 100, it means there will be cash to pay down the debt. Telus also has a bunch of assets within it that it can sell, and they’ve made mention that they are trying to offload some assets, and the chunk of cash that would come from an asset sale would also help to reduce the debt.

Bottom line, though, I don’t know that you’re going to get a lot in terms of company growth out of Telus over the next three years.

Maybe that means not much in terms of share price appreciation, but for yield-hungry investors, to me, I think this week’s announcement makes it a really attractive situation. I mean, a 9% pretty near guaranteed dividend payout is what income investors sort of dream of. So I think dividend investors should be very interested in this week’s development out of Telus.

Nick: Yeah, there were some questions around sustainability of that dividend. Now, shareholders can, if they believe what management has told them, believe that that dividend should remain in place. 9% dividend yield, certainly attractive in this environment where the risk-free rate is in that low 4% range.

That’s all the time we’ve got for this edition of The Five-Minute Major. A reminder, if you want more stock ideas from us, please click on the info icon in the upper right-hand corner. Hope to see you next time. Until then, thanks for joining us, and Fool on!

The post 9% Yield: Is Telus’s Dividend Safe? appeared first on The Motley Fool Canada.

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More reading

• What’s Going On With Telus’ Dividend?
• 3 TSX Dividend Stocks That Just Raised Their Payouts
• Transform Your TFSA Into a Cash-Creating Machine With $15,000
• 3 Blue-Chip Dividend Stocks Every Canadian Should Own
• Is Telus Stock a Buy Today for Its 9.2% Dividend Yield?

Fool contributor Iain Butler has positions in TELUS. Fool contributor Nicholas Sciple has positions in Rogers Communications. The Motley Fool recommends Rogers Communications and TELUS. The Motley Fool has a disclosure policy.