Among the large-cap telecommunications companies in the Canadian market, Telus (TSX:T) has been among the worst performers over the course of the past year.
One look at the chart above, and it’s clear to most that Telus is not going to be considered a leading stock in this sector, at least from a capital appreciation perspective. Given the fact that Telus stock has declined over the past five years, one could make the argument that it’s Telus’ dividend yield that’s provided most of the gain for investors over this timeframe. I think that’s the correct view.
Now, with this high-yielding dividend stock stating its intention to forego dividend increases over the next few years (with its intention to use any excess fashion flow to pay down debt), investors are left to rationalize whether this stock is worth investing in, even from a dividend perspective.
Let’s dive into this key announcement and what it may portend for Telus’ five-year outlook from here.
Less dividend growth, more free cash flow generation
Telus’ management team has put in place a plan to raise its cash flow at a double-digit rate over the next three years, ultimately covering its existing dividend by 2027. For investors who may be concerned that this dividend pause may lead to an ultimate cut in the years to come, the good news is that Telus appears to be a company intent on holding its current distribution in place.
With a current dividend yield of 9.5%, the market doesn’t seem to be on the same page with Telus’ analysis of its current situation. Many appear to believe that this is a company that can no longer handle its heavy distribution payout, and that’s something to contend with.
That said, the robust nature of Telus’ cash flow stream and a relative lack of competition in the large-cap telecom sector does position Telus well for continued upside from here – that is, if market participants come to buy what Telus’ management team is selling.
For now, Telus stock looks like a hold here. I think this stock could drive minimal capital appreciation upside over the next five years, with investors needing to believe that their near-double-digit dividend yield will be sustained. For those with less ability to believe in such a future, this is a stock that may be best left alone for now.
