Telus Inc. (TSX: T) is one of Canada’s top telecom companies, boasting a strong history of dividend growth and shareholder value creation. But industry dynamics have been challenging in the last two years or so. This has hit Telus’ profitability and its ability to continue to fund the same type of dividend growth it has seen in the past. Telus’ stock price has also been hit, as it began to reflect this reality.
Today, Telus stock is yielding an incredible 9% and trading at 19 times this year’s estimated earnings. This can either be the best time to buy Telus stock or a warning sign of danger ahead. Let’s explore.
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Looking for yield
The Bank of Canada has lowered its key interest rate six times since June 2024 to the current 2.75%. This means that it’s once again much harder to get decent yields through bond investments. Therefore, as investors, we have to take on more risk if we want meaningful yields.
This leads me to Telus.
Strong results considering the difficult backdrop
Telus has done a fine job in this challenging telecom environment. Yes, the company’s net income has declined over the last five years, but its operating cash flow has increased 6% to $4.9 billion in 2024.
Also, in Telus’ most recent quarter, its revenue increased slightly while its earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 3%. At the same time, adjusted earnings per share (EPS) fell 8% to $0.24. Though the company’s operating cash flow and free cash flow increased 4% and 8%, respectively.
All of this has been due to Telus’ strong customer growth and the company’s focus on profitable margin accretive customer acquisitions. It was also driven by Telus’ continued focus on providing comprehensive bundled services across mobile and home solutions.
Finally, Telus’ growth is being boosted by the telecom company’s efforts to diversify and expand into new areas. For example, Telus Health is continuing to post strong growth. Telus Health offers value-added services such as virtual healthcare and electronic medical record solutions. In its latest quarter, Telus Health saw revenue and adjusted EBITDA growth of 18% and 24%, respectively.
Can Telus cover its dividend payments?
Despite all of this, Telus has reached a crossroads. Its current dividend payments have finally caught up with the company. In fact, Telus’ current payout ratio is more than 200%. In its latest quarter, the company actually paid its dividend with debt. From a cash flow perspective, it looks a little better. Still, Telus’ operating cash flow does not cover its capital expenditures plus its dividend.
We all hoped that the competitive environment would ease so that Telus could carry on with its dividend growth program. But this didn’t happen soon enough and so Telus was forced to take action.
Telus pauses its dividend growth program
Back on December 3rd, Telus paused its dividend growth program in the hopes of getting on top of the situation. This course of action will help Telus achieve its goal of reducing its net debt-to-EBITDA leverage ratio to approximately 3 times by year-end 2027. It’s currently at 3.5 times.
Yet, the long-term outlook remains strong for Telus stock. Telus is continuing to develop its product portfolio, which is driven by data and artificial intelligence capabilities. This will go a long way in helping the company achieve its free cash flow targets in the coming years – $2.15 billion in 2025, growing at a minimum 10% growth rate from 2026 to 2028.
These projections translate into a cash divided coverage ratio of approximately 75% for each of these years.
Related: Hear what Motley Fool Canada’s chief investment officer thinks about Telus today
