The Canadian stock market has delivered impressive returns over the past couple of years, pushing many stocks to elevated valuations. In such an environment, it’s becoming increasingly difficult to find quality companies that still trade at attractive prices.
One notable exception is TELUS (TSX: T). Since peaking in 2022, the telecom giant has lagged the broader market, leading some investors to dismiss it as “dead money.” However, that pessimism may be creating an opportunity. With a dividend yield of roughly 9.3% and potential strategic changes on the horizon, TELUS could reward patient investors who are willing to look beyond short-term concerns.
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A massive dividend that’s hard to ignore
TELUS’s dividend yield is quite a standout. At around 9.3%, it is significantly higher than the Canadian market yield of roughly 2.3%. For income-focused investors, that level of yield is difficult to overlook.
Importantly, the dividend has been supported by free cash flow. Over the last 12 months, TELUS’s dividend-payout ratio based on free cash flow was about 69%, suggesting the company has been generating enough cash to cover its distributions.
However, another metric tells a more cautious story. Based on net income, TELUS’s payout ratio was approximately 146%, meaning the company has been paying out more in dividends than it has earned in profits. While this doesn’t automatically signal trouble, it does highlight why some investors worry about the sustainability of the payout.
For now, management appears committed to maintaining the dividend. Still, investors should recognize that a reduction remains a possibility.
New CEO could unlock value
A major catalyst for TELUS is the upcoming leadership change. Former CIBC (TSX: CM) chief executive officer (CEO) Victor Dodig is set to take over as TELUS’s chief executive on July 1, and expectations are high.
Dodig built a strong reputation during his tenure at CIBC. From a recent Globe and Mail article, “How Telus’s unexpected CEO change came about”:
“Over a decade at the helm of CIBC, Mr. Dodig delivered the largest takeover in the bank’s history and rebuilt the balance sheet and culture, moving the bank from worst to first on customer satisfaction.”
At TELUS, Dodig may pursue similar strategic improvements. One possibility is asset sales aimed at simplifying the business and strengthening the balance sheet. The company has expanded into several adjacent areas in recent years, including digital customer experience and agriculture technology.
Segments such as TELUS International have faced margin pressure after costly acquisitions, while TELUS Agriculture has struggled to deliver the expected results. Selling or restructuring some of these assets could free up capital to reduce debt, improve financial flexibility, and refocus on core telecom operations.
Such moves might also open the door to a dividend adjustment if management believes reinvestment or debt reduction offers a better long-term payoff.
Why income investors should still pay attention
Even in a downside scenario, TELUS may remain attractive for income investors. Canadian telecom companies have a long history of paying dividends, making a complete elimination of the payout highly unlikely.
Even if TELUS were to cut its dividend in half, the yield would still sit around 4.6%, which is roughly double the broader Canadian market’s yield. That would remain competitive while giving the company more financial breathing room.
Meanwhile, the stock appears undervalued. According to Yahoo Finance, analysts have a consensus price target of $21.38. With shares trading near $18, that implies more than 15% undervaluation and potential upside of roughly 18% in the near term.
Investor takeaway
TELUS may not be the market’s hottest stock, but its combination of a 9.3% dividend yield, discounted valuation, and potential strategic changes under a new CEO makes it worth a closer look.
While the dividend carries some risk, even a reduced payout could remain attractive. For long-term investors seeking income and possible upside, TELUS could be a good stock to consider buying in bulk.
