4 Risks to Telus Corp’s (TSX:T) Dividend

Telus Corporation’s (TSX:T)(NYSE:TU) dividend-coverage ratio, high debt, capex requirements, and low cash could imperil the hefty dividend.

| More on:
Red siren flashing

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In terms of price stability, telecommunication stocks like Telus (TSX:T)(NYSE:TU) are rock solid. Telus stock has been basically flat since early 2013, with a few peaks and troughs in between. However, that doesn’t mean the company has eroded value for shareholders over that period. Instead, its dividend rate has been far higher than the rate of inflation and the average yield on Canadian government bonds.

In other words, Telus is the quintessential income seeker’s stock, paying out nearly every penny it earns from a stable stream of cash flows every year. That’s because Telus is one of the five largest telecommunications companies in the country and holds 20% market share.

Over the years, the top five players in Canada’s wireless market have tightened their iron grip on the sector. That’s what makes this space a remarkably fertile ground for dividends.

Telus investors, for instance, can expect a 4.66% forward dividend yield and an 82% or higher payout ratio. Although that dividend rate has been stable for the past five years, investors shouldn’t take it for granted. Here’s a look at some sustainability measures to see if Telus can continue splashing out cash over the next five years.

Dividend coverage

The dividend-coverage ratio is simply the inverse of the payout ratio. As the name suggests, this ratio should indicate how much of the annual dividend is covered by the company’s net income. For Telus, the coverage ratio is 1.22, which means earnings are just 22% higher than dividends.

However, the coverage ratio seems much lower when you adjust the trailing 12-month free cash flow for leverage. This leverage-adjusted cash flow is 4.5% lower than the annual dividend.


Another critical factor for dividend sustainability is debt. If the debt burden is too large or expanding, investors may eventually have to concede the dividend to interest and principal repayments. Telus’s total debt currently stands at $14.21 Billion, or a third higher than equity. Debt is also nearly nine times greater than annual net income.


The amount of accumulated cash on Telus’s book, $415 million, wouldn’t even cover last year’s interest payment, $625 million. This cash pile is also a fraction of the annual dividends. In other words, the management is currently servicing debt from income, and a sudden plunge in earnings will have an immediate impact on dividends.

5G rollout

The biggest near-term capital expenditure telecom companies can expect is the deployment of next generation wireless technology. The 5G rollout over the next few years will demand a major chunk of the market leaders’ investment budget. With the ongoing tensions with China and Prime Minister Justin Trudeau’s potential ban on Huawei products, these costs could rise significantly.

Bottom line

High debt, low cash, low coverage, and higher-than-expected costs of adopting new technology are just some of the risks Telus’s dividend faces. There’s no reason to believe management hasn’t considered these risks and isn’t adequately prepared with contingencies, but income-seeking investors need to watch these factors closely if they’re in it for the long haul.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in the companies mentioned. 

More on Dividend Stocks

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Oversold TSX Stocks to Buy in July

Invests can now find good value right now in top TSX dividend stocks.

Read more »

You Should Know This
Dividend Stocks

OSFI: Mortgage Arrears Only 0.15% Despite Rate Hikes

The OSFI is happy with the low mortgage delinquency but remains worried over the impact of rising rates on Canadian…

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Great TSX Stocks to Start a TFSA Retirement Fund During a Market Correction

These top TSX dividend stocks look cheap right now to buy for a TFSA retirement portfolio focused on passive income…

Read more »

consider the options
Dividend Stocks

Recession Worries? Try Buying These 2 Stocks

Consider investing in these two safe dividend stocks if you are worried about your investment returns due to fears of…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

TFSA Investors: Should You Be Holding Cash Now?

Holding cash might not be the best option for TFSA investors in 2022, but using surplus cash to purchase dividend…

Read more »

stock market
Dividend Stocks

4 Dividend Stocks With Yields of at Least 5% in a Bearish Market

By investing in these stocks, investors can earn reliable dividend yield of 5% or more.

Read more »

Path to retirement
Dividend Stocks

Retirement Investors: 2 Top Defensive TSX Stocks to Own During a Recession

These top defensive TSX dividend stocks look good to buy for a retirement fund during an economic downturn.

Read more »