The last time I wrote about Telus (TSX:T) on July 13, I warned that its elevated dividend yield looked increasingly vulnerable and that a payout cut could be coming in the near future.
Lo and behold, Telus finally pulled the trigger on July 31, and the reduction was even larger than I expected. The company reset its quarterly dividend from $0.4184 to $0.1875 per share, a reduction of roughly 55%.
That takes the annualized payout from about $1.67 to just $0.75 per share. Management expects the reset to produce approximately $2.7 billion in cumulative cash savings through 2028, money that can instead go toward reducing debt.
Investors were not impressed. Telus shares fell roughly 11% following the announcement, trading around $13.35 that day. I think the reaction makes sense. Telus built much of its reputation among Canadian income investors around a steadily growing dividend. Once that proposition disappears, shareholders have to reassess why they own the stock in the first place.
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Telus isn’t out of the woods
Cutting the dividend helps Telus retain more cash, but it does not solve the company’s underlying growth problem. Canadian telecommunications companies benefited for years from population growth because more people meant more potential wireless, internet, and home-service customers.
With Canada’s immigration policy becoming less supportive of rapid population growth, that source of easy customer additions becomes less dependable. Telus therefore needs to find growth elsewhere while competing in a mature domestic telecommunications market.
At the same time, the company is trying to repair its balance sheet. The dividend reset is explicitly part of a deleveraging strategy, with Telus now targeting net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) of three times or lower by the end of 2028. That’s progress, but I want to see that leverage come down before becoming enthusiastic about the stock again.
Capital spending isn’t going away
Another problem with telecommunications is that maintaining a competitive network requires continuous investment. Telus has spent heavily transitioning customers from older copper infrastructure toward fibre-optic networks. Those investments can improve network quality and economics over time, but the capital has to come from somewhere.
Telus also has ambitions in artificial intelligence. The company has been developing Sovereign AI Factories, including facilities in Rimouski and Kamloops. I understand the strategy, but Telus does not possess the enormous free cash flow generation of the U.S. hyperscalers spending tens of billions of dollars annually on AI infrastructure.
Every dollar allocated toward new growth initiatives has to be balanced against debt repayment, network investment, and shareholder returns. The dividend cut gives management additional breathing room, but those competing capital demands remain.
I’m still not catching this falling knife
The lower share price and reset dividend will inevitably tempt some value and income investors. I’m staying away.
A dividend cut can improve the financial health of a company, and Telus is now retaining substantially more cash for deleveraging. But I don’t think that automatically makes the stock cheap or fixes the structural challenges facing Canadian telecommunications.
There are simply other places on the Toronto Stock Exchange where I would rather look for dividends, including companies with healthier payout ratios, stronger free cash flow, and better growth prospects.
For now, I would forget about trying to call the bottom on Telus. Canadian telecom stocks have looked like dead money for some time, and I need to see meaningful improvements in free cash flow, leverage, and underlying growth before changing that view.
