TELUS (TSX: T) has been under heavy scrutiny since a J.P. Morgan report on November 18 called the telecom giant’s long-standing dividend growth strategy “unsustainable.”
The market reacted swiftly, pushing the stock to new 52-week lows below $18 per share. For income investors accustomed to TELUS’s reputation as a reliable dividend grower, the sell-off raised deeper questions: Was the skepticism warranted, and more importantly, is the now-towering 9% yield an opportunity — or a warning sign?
In an unexpected move that appeared to respond directly to the market’s concerns, TELUS paused its dividend growth program shortly after increasing its quarterly payout last month. The decision marked a notable shift for a company that had delivered consistent dividend raises for two decades.
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Why TELUS paused dividend growth
Speaking to BNN Bloomberg, Doug French, TELUS’s executive vice president and CFO, gave rare candid insight into the company’s rationale.
“Our share price had been under pressure, and the dividend yield had increased to a level that we believed warranted the pause on the growth,” he explained. “We don’t believe the share price currently reflects our growth trajectory, and with the yield being higher, we did the pause until the recovery of that share price occurs.”
In other words, TELUS sees its stock as undervalued and believes freezing the dividend is a proactive, strategic step rather than an admission of weakness. Still, the pause introduces uncertainty: no one knows when, or if, dividend growth will resume.
At the core of TELUS’s decision is a larger deleveraging plan aimed at strengthening the balance sheet. The strategy includes selling non-core assets and reducing its net-debt-to-EBITDA ratio from 3.5 times at the end of the third quarter to times by 2027. For a capital-intensive telecom business, reduced leverage could meaningfully increase financial flexibility in the years ahead.
A 9% yield: Sustainable or a red flag?
A yield approaching double digits often signals risk — and TELUS is no exception. Over the past 12 months, the company paid more in dividends than it reported in net income, a figure that can spook conservative investors. But net income only tells a part of the story.
More importantly, TELUS produced $2.3 billion in free cash flow (FCF) over the same period, resulting in a payout ratio of roughly 69%. That’s not alarmingly high — especially for a telecom operator with predictable cash generation.
Looking ahead, TELUS expects about $2.2 billion in FCF this year with plans for roughly 10% annual FCF growth through 2027. If management executes well, the dividend appears supportable, especially without further increases.
Based on last quarter’s payout, next year’s FCF payout ratio would land near 74%, still within a reasonable range for a mature telecom.
Is the stock worth buying today?
From a valuation standpoint, TELUS appears modestly discounted. Analyst consensus suggests the stock trades at a 19% discount to fair value, and near-term upside could reach almost 24% from the current $18.54 quotation. Notably, even the most bearish analyst believes the stock is fairly priced.
Given that most investors look to TELUS primarily for income, the decision to pause dividend growth may actually strengthen the investment case. A well-supported 9% yield is more than enough to satisfy income-focused portfolios — and the company’s balance-sheet cleanup could create long-term upside beyond the dividend alone.
TELUS now stands as a potential multi-year turnaround story. Investors are being paid generously to wait while management works to restore financial strength and unlock renewed growth. For patient income investors, that combination may be compelling.
Related: Hear what Motley Fool Canada’s chief investment officer thinks about Telus today
