Canada’s telecommunications companies, particularly Telus (TSX: T), are my least favourite. As a Telus customer, I’ve had to file two regulatory complaints with the CCTS. One involved incorrect billing. Another stemmed from my internet service not being connected for nearly a month after moving, including lengthy delays in getting fibre installed.
So, admittedly, it has given me no shortage of satisfaction to see telecom stocks rank among the weakest performers in the Canadian market over the past couple of years. It is also a reminder that operating in an oligopoly does not automatically result in good returns.
There are several reasons investors have soured on the sector, but one of the biggest is growing concern over dividend sustainability. According to Yahoo Finance, Telus currently sports a trailing annual dividend yield of roughly 11.2%.
Whenever you see a double-digit dividend yield, it should immediately raise a few questions. Usually, one of two things is happening. The share price has fallen sharply. Or, the company is paying out more cash than it comfortably generates.
In Telus’s case, there are elements of both. Let’s take a closer look at what is happening, and what I think is in store for the future.
Source: Getty Images
What’s going on with the dividend?
One confusing aspect of Telus is that the dividend payout ratio looks dramatically different depending on which accounting metric you use. If you calculate it using earnings, Yahoo Finance currently reports a payout ratio of approximately 278%. That sounds catastrophic, but it is also somewhat misleading.
Telecommunications companies, much like pipelines and certain other infrastructure-heavy businesses, record significant depreciation expenses. Those are non-cash accounting charges that reduce reported earnings even though they do not necessarily represent cash leaving the business. Telus has also been dealing with restructuring costs, heavy infrastructure investment, and elevated interest expenses over the past couple of years.
For those reasons, free cash flow provides a much better measure of dividend sustainability than earnings. Unfortunately, even that picture is not particularly encouraging. Based on unadjusted free cash flow, Telus is currently paying out roughly 110% of its free cash flow. If you adjust for the company’s dividend reinvestment plan (DRIP), which management is in the process of eliminating, the payout ratio improves to roughly 75%.
While that is considerably better, it still sits at the upper end of Telus’s long-term target of distributing 60% to 75% of free cash flow. Management clearly recognizes the issue. The company has been gradually winding down its DRIP during 2026, has paused dividend growth, and is maintaining its quarterly dividend at $0.42 per share while focusing on improving the balance sheet. The stated objective is to reduce net debt-to-EBITDA to approximately three times by the end of 2027.
Is Telus a buy?
Personally, I would stay away. The current situation reminds me a great deal of what happened with BCE (TSX: BCE). There, investors watched dividend growth stall, the yield climb into double digits, and confidence steadily erode. Eventually, the dividend was cut by roughly 50%, and the yield (and share price) quickly adjusted lower as expectations reset.
I am not saying Telus will necessarily follow the exact same path, but I do think this has many of the characteristics of a classic falling knife. For years, Telus built its investment case around delivering a reliable and steadily growing dividend. That consistency attracted a large base of income-focused investors.
Once dividend growth stops, investors begin questioning whether the next step could be an outright cut. If that happens, confidence can deteriorate further, leading more income investors to sell. That selling pressure can drive the share price lower, pushing the dividend yield even higher and creating a negative feedback loop.
There may eventually be value in Telus again, but I do not think the risk-reward looks particularly attractive today. For investors primarily seeking dependable dividend income, I would currently feel much more comfortable looking at Canada’s banks or pipeline companies, both of which appear to offer stronger fundamentals over both the short and long term.
