For years, Telus (TSX: T) was one of the most popular dividend-growth stocks in Canada. However, after its share price declined significantly and its yield climbed into the double digits, it became increasingly clear that the dividend was becoming difficult to sustain.
That’s why it wasn’t a surprise to many investors when Telus finally reset its quarterly dividend in July with a massive 55% cut.
And while dividend cuts are never ideal, especially for investors who bought Telus specifically for passive income, the reset had become necessary.
Yet even with the dividend cut and Telus looking to regroup, the stock has continued falling since the announcement and now trades around $11.80, down more than 40% over the last year.
So, with the bad news now well known and the reduced dividend still offering a yield of roughly 6.3%, investors may be wondering whether Telus is finally worth buying, whether it’s time to sell or whether the best move is simply to hold.
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Why the dividend cut was necessary
The most important thing for investors to understand is that Telus didn’t cut its dividend because its core telecom business suddenly stopped generating cash.
It cut the dividend because the payout had grown too large relative to its free cash flow while the company was already carrying a significant amount of debt.
That distinction matters because an unsustainable payout can be reset and debt can be repaid, whereas a deteriorating core business would be much harder to fix.
Telus now expects to generate roughly $1.8 billion in free cash flow in 2026, down considerably from its previous forecast of $2.5 billion. Meanwhile, its old dividend would have cost roughly $2.7 billion annually at today’s share count if every investor took the payment in cash.
The dividend reinvestment plan helped Telus conserve some cash, but it did so by issuing additional shares and diluting existing investors. Therefore, maintaining the old payout was clearly no longer realistic.
The new dividend should cost roughly $1.2 billion annually, or about two-thirds of its current free-cash-flow guidance. That remains above Telus’s new payout target of 45% to 60%, meaning free cash flow still needs to grow before the payout falls within management’s preferred range.
Even so, management expects the cut to save approximately $2.7 billion through 2028 and will also eliminate the discount on its dividend reinvestment plan.
That additional cash is crucial. Telus ended the second quarter with net debt of roughly $26 billion and a net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.5 times.
Management now expects to reach approximately three times or lower by the end of 2028, a year later than previously planned.
Telus is also reviewing its portfolio and exploring sales of non-core Telus Health and real estate assets, with any proceeds directed toward debt reduction.
So, although the cut is painful, it should ultimately leave the company in a much stronger financial position.
Is Telus stock a buy, sell or hold today?
Its core telecom operations remain essential and resilient, and the business continues adding customers even as growth has slowed. Furthermore, with the stock trading near a fresh 52-week low, its share price already reflects significant pessimism.
At an enterprise value of roughly 7 times its forward EBITDA, though, Telus isn’t so cheap that investors can ignore its operating and balance-sheet risks. It is, however, trading below its five-year average forward EV/EBITDA ratio of 8.5 times.
It’s also worth noting that Telus continues to face intense competition, slower subscriber growth and higher interest expenses.
So, although Telus is considerably cheaper than its historical average, I still think the stock is a hold today.
I certainly wouldn’t sell the stock solely because of the dividend cut. The reset was necessary, the new payout is much easier to support, and Telus now has more cash available to reduce debt and strengthen its financial position.
However, I also wouldn’t aggressively buy the stock just because it looks cheap and still yields more than 6%.
Telus still has work to do, particularly when it comes to stabilizing free cash flow and reducing leverage, before it becomes a clear buy. However, if management can deliver that progress, today’s depressed price could eventually offer significant recovery potential.
