It has been a tough year for TELUS (TSX:T) shareholders. Its stock is down 13% year to date and 17% over the past 52 weeks. As a result of its swift decline, TELUS is trading with a dividend yield that it has not seen in years.
Its dividend yield is 6.4% today. The last time it traded with a dividend yield over 6% was in the depths of the 2008-2009 Global Financial Crisis. Given this dynamic, many investors may be asking whether this is an excellent buying opportunity or a chance to run for the hills.
While it might look attractive right now, here are a few considerations before buying TELUS stock.
Interest rates are a headwind
TELUS has been busy with an elevated capital spending program over the past several years. It has been installing 5G technology, acquiring large portions of wireless spectrum, and installing fibre optics across its network.
Today, TELUS has one of the best quality networks amongst peers. Over 90% of its network has access to super high-speed fibre optic networks.
However, this has come at a cost. TELUS net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio has increased from 3.2 times last year to 3.84 times today.
Since 2022, net debt has increased by 10% to $26.6 billion. Most of this is due to recent spectrum licence purchases and the acquisition of LifeWorks.
However, at the same time, its weighted average interest rate has increased from 3.7% to 4.2%. The combination of rising interest rates and elevated debt is starting to concern the market.
TELUS had a tough second quarter
Unfortunately, TELUS delivered second-quarter results that were below the market’s expectations. Customer additions continue to be strong, and EBITDA was up 13%. Yet net income dropped by 61%. The company had to lower its 2023 guidance to factor in significant weakness at its digital customer experience subsidiary, TELUS International.
The one bright spot for investors is that TELUS’s management acknowledged challenges in its profit margins and committed to aggressive restructuring, layoffs, and efficiency efforts.
Some analysts believe this could result in $400-$500 million of EBITDA savings by 2025. Investors will need to closely monitor TELUS’s progress on achieving these savings.
Is the dividend safe?
Right now, TELUS dividend is not being funded by income or free cash flows. While it has a long-term target of the dividend being 75% of free cash flows, its free cash flow payout ratio is currently 111%.
Now, TELUS has been promising that it will be radically pulling back its capital spend in 2024. Consequently, it expects to earn an outsized level of free cash flow that should put its payout ratio in the green.
Management continues to believe in its dividend growth profile of 7-9% annually to 2025. It believes it will earn more free cash flow than it will have uses for it in the years ahead.
The Foolish takeaway on TELUS stock
At the end of the day, investors will have to make a bet on management here. The current dividend payout is not sustainable. However, if it can do what it says and execute its efficiency initiatives, its dividend should be safe in the long term.
Likewise, you can pick up the stock at valuations and yields that have not been seen in many years. Chief Executive Officer Darren Entwistle has recently been betting on the stock at much higher prices.
Yet investors do need to be cautious. The yield should not be the only reason to buy a stock. Investors must keep in mind current risks, like rising telecom competition, regulatory headwinds, debt, rising interest rates, and weakness in its tech-focused subsidiaries.
