Telus (TSX:T) is one of Canada’s highest yielding large cap stocks. With a 6.3% dividend yield at Friday’s closing price, it throws off quite a bit of income. If you invest $100,000 in Telus today, and the dividend never changes, you will get $6,300 in annual cash back each and every year. That’s a pretty good return, but the question is whether the dividend will change – specifically, whether it will decrease. Telus has a payout ratio above 100%, meaning it pays more in dividends than it earns in profit. That tends to be a warning sign for a dividend that’s about to be cut, but as we’ll see, it does not necessarily mean that T stock is a guaranteed money loser.
Why T stock has such a high yield
Telus stock has a very high dividend yield for two main reasons:
- The stock price has fallen over the last five years.
- The dividend has increased.
Over the last five years, T’s dividend has risen by a 6.47% CAGR, or 36.8% cumulatively. That’s a pretty decent dividend growth rate. Unfortunately, the growth in dividends has not exactly been supported by growth in earnings. Telus, like many other telcos in the last five years, has seen its earnings decline. Specifically, its per-share profit has declined by an 8.9% CAGR over the last five years. On the plus side, revenue has at least grown in the period. But dividends ultimately need to be paid from earnings and/or free cash flow; otherwise, the company will have to borrow money to pay them. So, T’s high dividend payout ratio is not ideal.
Why the stock has been beaten down
Telus stock has been beaten down in the markets for several reasons. First of all, its earnings are down, as mentioned previously. Secondly, it has a lot of debt, which in this high-interest rate era, is not a positive. Third, telco stocks in general have been selling off in recent years, due to a combination of high interest rates and lousy operational results.
So, Telus stock’s long-term trajectory hasn’t been great. However, the most recent quarter may have marked a change in the trend. In it, the company’s revenue increased 12.8%, its free cash flow grew 36%, and subscribers increased by tens of thousands. If Telus can keep these kinds of results up, then maybe it will turn things around. Do beware of the interest rate, though: that will likely be a problem for the company for the foreseeable future.
Is the dividend safe?
Having reviewed Telus’ recent quarterly results, we can finally answer the question:
Is this Canadian domestic company’s dividend safe?
Personally, I think that, given its strong growth in free cash flow, Telus can keep paying its dividend at the current level. I do not think it would be wise or desirable for the company to increase its dividend right now, as it likely won’t fail to make payments. Therefore, I suspect that those buying T stock now will get the 6.3% yield they expect. That’s no guarantee, but it is a fairly likely outcome.
