Telus (TSX:T) stock has a very high dividend yield. At 5.3%, it’s higher than the yield you will get from most Canadian banks, utilities, or energy stocks – and all of those sectors are known for having high yields. If you buy Telus stock today, you should enjoy significant dividend income, at least in the short term. However, there are downsides to investing in T stock as well. The company’s earnings are currently down over a five-year period, and the stock is currently down from a high set in 2022. So clearly, there are risks to investing in Telus stock, as well as opportunities. In this article, I will explore Telus stock to help you determine whether it’s worth adding to your portfolio.
Telus’ recent earnings
Telus put out a fairly strong recent quarterly earnings release compared to its performance over the last three years. In it, the company reported:
- 168,000 mobile customers, up 10.1%.
- 58,000 total customer additions.
- $224 million in net income, down 44.6%.
- $1.8 billion in adjusted EBITDA, up 10.7%.
- $525 million in free cash flow, up 29%.
Overall, it was a pretty mixed quarter. The company’s earnings declined but its free cash flow grew quite a bit. The release was overall an improvement compared to 2020 and 2021, when the COVID-19 pandemic was negatively affecting Telus’ business. However, the release on the whole was nothing to write home about.
Long-term growth and profitability
Having looked at Telus’ most recent quarterly results, we can now turn to the long-term picture.
Over the last five years, Telus has compounded its revenue, operating income, and earnings per share at the following annualized rates:
- Revenue: 7.1%.
- Operating earnings: 1.4%.
- Earnings per share (“EPS”): -4.9%.
It’s a little alarming to see Telus’ earnings declining over a five-year period. Sometimes companies’ earnings go down due to temporary setbacks, but this is a very long period over which Telus’ business has been declining in profitability.
The good news is that Telus is still fairly profitable, despite the profits shrinking. In the most recent 12-month period, the telco had a 34% gross margin, 15.9% operating margin, and 7.8% net margin. These aren’t the highest margins you’ll see anywhere on earth, but they’re basically satisfactory.
Dividend sustainability
As we’ve seen, Telus is a profitable business whose profits are unfortunately shrinking. It’s probably not the kind of company you’d buy for any reason other than the dividend.
Does that juicy 5.3% dividend actually make Telus stock worth buying?
Unfortunately, there are some red flags here as well. Telus has a 118% payout ratio going by earnings, and a sky-high 253% payout ratio by cash flows. It looks like the company is paying out more in dividends than it has coming in in profit. This might not be fatal if management has a credible reason for thinking that profits will ramp up dramatically in the future. For now, though, T’s dividend appears to be on shaky ground.
That’s not to say you shouldn’t buy Telus stock. Like any mature, stable company, it merits a place in a diversified portfolio. But chasing Telus’ dividend probably isn’t the best idea. There are other companies out there with similar yields but far lower payout ratios.
