Long-time investors in the stock might feel shocked to see a 15% dip in share prices for Telus Corp. (TSX: T). One of the biggest telco stocks in Canada, Telus reported a massive $1.8 billion net loss after it made a goodwill impairment of TELUS Digital’s cash-generating unit worth $2.1 billion. The net loss was a big factor, but the measure was a one-off payment. The factor that could be attributed to such a steep decline in a short time could be the announcement of dividend cuts.
Seasoned investors know that when a stock cuts, pauses, or slashes dividends, there has to be a solid reason behind it. Companies distribute dividends as rewards to shareholders for remaining invested in the stock. However, a stock paying dividends that it cannot sustain will ultimately lead to far worse outcomes.
While the dividend cut might make some investors wary of investing in Telus stock, seasoned investors might consider it a smart move and a relief.
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Telus
The $21.1 billion market-cap TSX telco stock needs to relieve pressure on its financials in order to remain in business. Telus has more than $30 billion in long-term debt on its books, and such high debt levels have reduced the underlying business’s ability to fund more capital programs and increase dividends.
The business itself is doing alright, thanks to its assets generating sufficient and fixed cash flows. However, the interest rate hikes between 2022 and 2023 put immense pressure on its financials due to the higher borrowing costs. The higher interest rates slowed the growth of this stock, which is now paying $1.3 billion in annual interest payments alone. This accounts for a little less than a third of its operating cash flow.
The management at Telus has to take measures to maintain the ability to pay off its debt without compromising the performance of the underlying business. This is the only way for Telus to reduce its debt, recover, become more efficient, and accelerate growth.
Foolish takeaway
Telus has a new Chief Executive Officer (CEO), Victor Dodig. Among his early interactions on the earnings call for the second quarter of the fiscal year, he prioritized focus on debt repayment. It is a difficult decision to make. To align with the debt repayment strategy, Telus slashed dividends by 55%, and postponed the end of the 2% dividend reinvestment plan (DRIP) discount to October 1 of this year instead of the end of 2028.
All in all, these measures alone will rein in $2.7 billion in cash savings for the next three years. Putting this money toward repaying its debt will help Telus experience a turnaround and set itself up for substantial long-term growth.
Besides these measures, Victor Dodig is considering selling off the Telus Health and Agriculture subsidiaries. He also wants to prioritize increasing revenue from the company’s wireless business.
If you’re an investor itching to put money into the market, I would advise waiting for a bit. There might be further dips in share prices before the turnaround. Keeping an eye on the stock to pounce before it bottoms out might be the trick with this stock.
