Telus (TSX:T) is one of several telecom stocks that declared dividend raises this year. It raised its payout from $0.3511 to $0.3636 — a 3.5% hike. The move was accompanied by similar hikes from U.S. telco Verizon and others.
Based on its dividend hike, Telus’s management would seem to be confident in the future of their business. They’ve hiked the payout, which implies that they think the company will earn more profit in the future. At least that’s how it appears on the surface. If you look at the fine print, you’ll see that T’s latest dividend hike was smaller than the target range of 7-10%. Also, management warned that they may not be able to keep the hikes going through 2025. So, T’s latest dividend hike wasn’t as bullish as it appeared to be. In this article, I will explore the matter of Telus’s dividend and attempt to gauge whether it is sustainable.
Telus’s earnings
To gauge whether Telus’s dividend is sustainable, we need to look at its recent earnings. That way, we can tell how much of its profit the company is paying out in dividends. In its most recent quarter, Telus earned
- $4.9 billion in revenues, up 12.8%;
- $196 million in earnings, down 60%;
- $0.14 in earnings per share, down 58%; and
- $279 million in free cash flow, up 10.5%.
The growth in revenues and free cash flow was encouraging, but, nevertheless, we’ve got earnings and free cash flow both coming in lower than dividends paid. The $0.14 in earnings per share doesn’t come close to covering $0.3636 in dividends. Free cash flow is a bit higher ($0.19 per share) but still not enough to cover the dividend. In fact, it’s only a little over halfway there. So, it appears that Telus has a dividend sustainability problem. I’m not surprised that management warned the dividend-growth program might not last into 2025.
Does it have a moat?
Looking at Telus’s dividend coverage, we can see that there have been some issues. That doesn’t necessarily mean that the problems will last forever. If a struggling company has a strong competitive position (a “moat”) in a good industry, then we can reasonably expect its fortunes to turn around.
Does Telus have a moat?
It’s no monopoly, but its competitive position is relatively strong. It has only two large competitors in Canada: BCE and Rogers. Canada’s telecom business is notoriously hard to break into. U.S. competitors aren’t allowed into the market at all, and small local companies trying to offer cheap service face numerous regulatory and capital-raising hurdles. For this reason, I’d expect Telus to at least “survive” long term, though I don’t know if I can predict that it will “thrive.”
Long-term track record
Despite all of the downsides to investing in Telus that I’ve mentioned in this article, the company does have a good long-term track record. Over the last 10 years, its revenue has risen by about 5.7% per year, while its earnings have been roughly flat. This is not exactly a growth stock, but its earnings are at least stable enough for the dividend to continue being paid. At this point, though, one wonders whether the dividend will be all investors get.
