Dividend stocks are supposed to be the boring part of a portfolio. Telus (TSX: T) apparently missed that memo.
The Canadian telecom cut its quarterly dividend by 55% in July, taking it from $0.42 per share to $0.19. Shares have since fallen to $12.20, brushing against a fresh 52-week low and sitting roughly 45% below their 52-week high.
That looks ugly. Yet a dividend cut can occasionally be exactly what a struggling company needs. The question is whether Telus just destroyed its income thesis or finally started fixing it.
Source: Getty Images
A needed cut
A dividend ultimately comes from free cash flow. That’s the money left after a company pays operating costs and invests in the business. Telus had spent years investing heavily in fibre, spectrum, and network infrastructure while carrying substantial debt. Maintaining a rapidly growing dividend at the same time left increasingly little room to manoeuvre.
So management finally stopped trying. The new annualized dividend is $0.75 per share. More importantly, Telus changed its payout target to 45% to 60% of trailing free cash flow, down from its previous 60% to 75% range, and abandoned its dividend-growth model.
That should leave substantially more cash inside the business. Telus expects the reset to save about $2.7 billion through 2028, with much of it directed toward reducing debt. That’s painful medicine for income investors, but continuing to borrow while protecting an unsustainable dividend wouldn’t have been much of a treatment plan.
Prove it
Telus still owns an enormous collection of valuable assets. Its PureFibre and 5G networks serve millions of Canadians, while Telus Health and Telus Digital offer potential growth beyond traditional telecom services.
The core wireless business isn’t collapsing, either. Second-quarter mobile network revenue rose 1% to $1.7 billion, while free cash flow increased 2% to $545 million. Telus added 17,000 mobile phone customers and 20,000 internet customers.
The real attraction now is what happens to that cash as major network spending slows. Net debt remained about 3.5 times adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) at the end of the quarter. Management wants that figure at approximately three times or less by the end of 2028, using dividend savings, growing free cash flow, disciplined capital spending, and asset sales. That’s the turnaround investors should be watching.
Small, but healthy
At $12.20 per share, the new $0.75 annual dividend still produces a yield of roughly 6.1%. That 13.7% theoretical yield on the old payout helps explain the problem. When a yield starts looking less like a telecom and more like a distress signal, investors should probably check the plumbing.
| DIVIDEND | BEFORE RESET | AFTER RESET |
|---|---|---|
| Quarterly dividend | $0.4184 | $0.1875 |
| Annualized dividend | $1.6736 | $0.75 |
| Yield at $12.20 | 13.7% | 6.1% |
| Target payout ratio | 60%-75% | 45%-60% |
A 6% yield is still substantial compared with many Canadian dividend stocks, particularly if Telus can eventually return to sustainable growth. Yet there is still plenty that could go wrong. The dividend cut didn’t magically repair the company.
Telus also slashed its 2026 outlook. It now expects service revenue growth between flat and negative 2%, adjusted EBITDA to decline 2% to 4%, and free cash flow of approximately $1.8 billion. Earlier in the year, that free-cash-flow target had been $2.45 billion. Telus Digital is another sore spot. The company recorded a $2.1 billion non-cash impairment during the second quarter as the unit’s outlook deteriorated. That combination makes Telus a repair job, not a victory lap.
Bottom line
For existing shareholders, I’d hold. Selling after the dividend has already been cut and the shares have fallen to around $12 risks locking in the damage just as Telus is finally retaining more cash to fix its balance sheet.
I wouldn’t rush to build a huge new position, though. Investors considering Telus inside a TFSA should want to see leverage actually moving lower and free cash flow stabilizing before assuming the turnaround has arrived. The old investment case was a steadily rising dividend. That story is gone.
The new one is considerably less glamorous: cut the payout, reduce debt, protect the core network, and rebuild free cash flow. If Telus can execute, today’s battered price could eventually look attractive. Until then, I’d hold the shares and make management earn the next buy.
