Canadian investors looking to buy a reliable dividend stock for future retirement income could feel better about loading up on, and holding TELUS (TSX:T) stock after pondering on the following key attributes about the passive-income investment. Knowledge is power, and smart investors overflow with it. Knowing just three things about TELUS stock as an investment could alleviate some income investors’ fears.
Let’s take a dive.
TELUS offers better diversification and organic growth prospects than its two Canadian big brothers
The Canadian telecoms market is an oligopoly dominated by three large players, and TELUS is the smallest (though marginally) incumbent. While BCE and Rogers Communications tussle each other as the largest industry stocks based on market capitalization, total subscriber base or total revenue, TELUS leads them both on revenue diversification and organic growth prospects – and that’s a huge factor for smart investors to buy and hold TELUS stock.
Thanks to its majority stake in TELUS International, the company recognizes 17% to 20% of its revenue from its non-telecom international data-driven growth segment.
Data sales to generative artificial intelligence (AI) projects, technology services to international businesses, agriculture industries and healthcare insurance coverage widely diversify TELUS’s business exposure beyond a tightly regulated and highly concentrated Canadian telecoms space.
Given its diversification and international exposure, TELUS could do better should any price wars engulf parts of the Canadian telecoms, internet, or cable space in 2024 and beyond.
Most noteworthy, international sales could do best if European companies get back to liberated discretionary spending once recession fears recede. The market is yet to witness how recent cost containment measures perform following a stumble during the third quarter. However, the bigger picture remains that TELUS hunts for growth, profits, and cash flows deep into international markets to bring riches home.
Bay Street analysts project a 5.5% five-year average annual earnings per share growth rate on TELUS stock – more than double BCE’s comparable earnings growth rate of 2% for the same period. Successful consolidation and realizations of cost synergies following a Shaw takeover could drive a 10.9% five-year earnings growth rate at Rogers, but that’s high-risk, expensive, and in-organic growth in my view.
Dividend payout rate not as high as generally believed
TELUS’ quarterly dividend has the allure of a high yield, but a 259.9% earnings payout rate looks beyond sustainable. However, the bloated payout rate isn’t the one smart investors look at when evaluating TELUS stock as a dividend income play.
Income-oriented investors love TELUS stock for its high-yield dividend payments. Following 19 years of consistent annual dividend raises, the current yield the dividend aristocrat towers around 6% annually. It has raised its quarterly payout by 31% since January 2020 to $0.38 per share. However, investors are increasingly concerned about sustainability issues. Perhaps they shouldn’t be.
Smart investors consider the company’s free cash flow payout rate as a better measure of dividend sustainability. The company’s significant depreciation and amortization charges on past massive capital investments can cloud its ability to generate sustainable distributable cash flow. Free cash flow is cash available after adjusting operating cash flows for capital expenditures. TELUS pays out between 60% and 75% of its free cash flow as dividends to stock investors. Management could have more room to grow the dividend once recent interest expense and cost pressures recede.
TELUS stock is a bond proxy that trades counter to interest rates
The company’s stable, highly regulated, and mature business, recurring cash flow, and stable dividend policy make TELUS stock a somewhat good bond proxy with a valuable (though somewhat riskier) capital and yield growth layer.
Smart investors can forgive the bond-proxy’s periodic underperformance versus the broader stock market during periods of rising bond yields. TELUS understandably underperformed the TSX over the past two years.
Unlike fixed-rate bonds that mature, TELUS stock may pay loyal long-term investors recurring dividends, grow its quarterly payouts, and potentially fetch higher stock prices over the next 30 years. No individual ordinary bond may replicate that!