Telus (TSX: T) finally slashed its quarterly dividend, cutting it by 55% and putting an end (a tearful one) to all the debate about whether or not the firm can keep the payout intact and where the company goes from here regarding its dividend policy.
Now, there’s no question that Telus’s dividend, which swelled to a 12% or so yield, was becoming a very heavy commitment, one that I thought took away from efforts that could have helped accelerate the turnaround. Indeed, once the dividend growth pause turned into a 55% cut, I’m sure a lot of investors were displeased enough to hit that sell button after hanging onto the slumping shares for quite some time.
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Telus under pressure
Of course, it’s never fun to be in a stock that just reduced its payout, especially as the stock continues to move lower with no end in sight. While I’m not so sure if shares of T have finally hit rock bottom, I think that the cut was inevitable and that it’s an opportunity for the management team to allocate capital in a way that’s more conducive to a timely rebound in a telecom environment that’s increasingly difficult to compete in.
Whether that’s the rise of fierce competition (think the likes of Freedom Mobile) or U.S. satellite connectivity providers (think Starlink), I think the former dividend darling has now become a stock that’s gone from easy to understand to too hard to understand.
With management targeting a new payout target so that it can avoid future cuts, even as the dividend yield starts to move higher again with every sustained dip in the stock, I’m just not so sure if the firm can get back to growth, as it also takes steps to improve the state of the balance sheet with debt repayments. With a brutal second quarter in the books and new lows in the stock, I think the beginning of a bottoming-out process can finally start.
The worst is already in for the dividend
The worst that passive-income investors feared with shares of T has already happened. The dividend got slashed (a 5.42% yield isn’t bad), a bad quarter was in the books, and it feels like just about everyone expects very little from the firm. Low expectations could accompany decent results moving forward, especially as operating costs look to come down alongside debt while also looking into AI opportunities.
Could it be that investors are discounting AI’s potential to help transform Telus for the better and help it get back on the dividend-growth track? Perhaps. Either way, I now consider the dividend to be incredibly safe, with decent growth prospects as the company looks to maintain discipline as it navigates a brutal climate.
The bottom line
Will Telus grow its dividend back to levels seen before the recent cut? Probably not anytime over the next decade. But for investors seeking a sustainable payout and decent enough growth, I wouldn’t shy away from Telus right here. I think the pieces are coming together to form a bottom as soon as the second half. If the firm can impress when others expect disappointment, perhaps T stock could rise as a fourth-quarter gainer that outdoes the TSX Index.
In short, Telus’s dividend is cut, it’s safe now, and it could be subject to growth sooner than investors think.
