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Is Telus Corporation’s Dividend Safe?

For a company to pay a dividend regularly, it needs to actually generate cash. That’s why so many people worry about cash flow when it comes to dividend investments, because how can a company possibly distribute funds if there are none?

Telus Corporation  (TSX:T)(NYSE:TU) is beginning to worry me because the company’s generated cash flow has effectively cratered compared to what it was earning last year. For reference, in 2015, Telus generated $1.078 billion in cash flow, whereas in 2016, it only generated $141 million. And to make matters worse, comparing Q4 2015 to Q4 2016, it went from generating $197 million cash flow to losing $191 million in cash flow.

This obviously concerns me because Telus paid out $272 million in dividends in Q4, not to mention the $39 million it spent buying Telus shares. So, if it lost $191 million in free cash flow, how was it able to pay out so much in dividends? The answer can be found buried deep in the Q4 earnings statement.

In September 2016, Telus had a public issuance of US$600 million in senior unsecured notes at 2.8%, due February 2017. The company used US$453 million to repay a former debt that it owned, but what about the remaining US$147 million? In the earnings document, management says, “… the balance to be used for general corporate purposes.” General corporate purposes can mean paying out dividends. And in December 2015, the company raised $1 billion in debt with $956 million used to pay back a former debt and then the rest for corporate purposes.

What this all means is that Telus is, in part, relying on loan interest bonds to put enough cash in the bank, so it can distribute a lucrative dividend. Now, it’s not uncommon for businesses to take on debt while still paying a dividend. But what concerns me about this is that more debt continues to be issued, which gets expensive, while the dividend continues to grow.

In the report, CEO Darren Entwistle said, “Notably, we returned over $1.2 billion to shareholders in both dividends and share purchases and we are targeting another 7-10% increase in dividends in 2017.” So, the company is not seeing any growth in cash flow (rather, it’s losing cash flow), but it still projects that it will be able to grow the dividend this year by anywhere from 7-10%. The only way to do that when cash flow is weak is to borrow the money.

Telus is incredibly strong, and it continues to experience growth. Further, it has amazing customer service that has allowed the company to keep its customer churn below 1% for 13 quarters. But nothing can grow forever.

With interest rates set to increase in the United States, and cash flow dropping, Telus will have to dedicate more of its resources to paying interest just so it can continue funding the growing dividend. There’s no reason to panic, but it’s important for investors to understand what’s going on. Telus, though a great company, is currently carrying a lot of debt, in part because it doesn’t want to slow its dividend growth. That’s concerning.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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