I’m one of those investors who thinks dividend income should make retirement planning easier, not leave you wondering how much money will arrive next quarter. That’s why Telus’s (TSX: T) recent decision to slash its dividend by 55% caught my attention, even though I can see why the company made such a difficult decision.
The cut reduced the Canadian telecom giant’s quarterly payout to $0.19 per share, turning what was once roughly $1,674 in yearly income from 1,000 shares into just $750. Adding to Tax-Free Savings Account (TFSA) investors’ concerns, Telus stock has plunged about 50% over the last year, leaving its shareholders facing both a smaller income stream and a big unrealized loss. But I wouldn’t view Telus’s dividend cut as the end of its investment appeal.
Let me explain how I’d evaluate Telus following its dividend cut and why some investors may be better off holding while others should prioritize protecting their TFSA income.
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Why Telus reduced its dividend
Before deciding what to do with Telus stock after its recent dividend cut, let’s quickly review what Telus expects to gain from making this painful but potentially necessary move.
While a 55% dividend cut might seem alarming, I believe the company is taking an important step toward building a financially stronger business. The company expects to save about $2.7 billion through 2028 by reducing its shareholder payouts, giving it more room to tackle its debt without abandoning investments in its wireless and fibre networks.
At the same time, Telus aims to bring its net debt-to-adjusted EBITDA ratio down from 3.5 times at the end of the second quarter to 3.0 times or lower by the end of 2028. Interestingly, its second-quarter free cash flow still increased 2% year-over-year (YoY) to $545 million, even as competitive pressures weighed on its earnings. If it can turn these savings into a healthier balance sheet and stronger cash flow, today’s painful dividend reset could eventually help Telus become a more dependable income stock in the years to come.
Should TFSA investors continue holding Telus stock?
For TFSA investors, I think the decision comes down to how much they depend on Telus for income and whether they could afford to wait for a recovery. At its current price of $11.03 per share, this Vancouver-based telecom company has a market cap of $17.5 billion and offers a 6.8% annualized dividend yield. That yield still looks appealing, but it shouldn’t distract investors from the challenges behind the stock’s decline.
In the second quarter, Telus’s revenue from customer contracts fell 2% YoY to $4.9 billion, partly due to lower mobile equipment sales and weaker Telus Digital revenue. The firm’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) slipped 2% to $1.8 billion, while its adjusted earnings declined 27% to $0.16 per share.
Still, I wouldn’t overlook the company’s growth efforts. Its mobile network revenue in the latest quarter rose 1% YoY to $1.7 billion, backed mainly by subscriber growth. Telus is also prioritizing investment in wireless, fibre networks and digital infrastructure. More recently, its successful satellite-to-smartphone integration test with AST SpaceMobile brought it closer to offering coverage in remote areas, with service expected for eligible customers within the next year.
Foolish takeaway
For investors who need predictable TFSA income today, I’d consider diversifying rather than relying heavily on Telus’s smaller dividend. On October 1, the company also eliminated its dividend reinvestment plan discount, although automatic reinvestment remains available. However, investors with a longer horizon may prefer to hold while monitoring debt reduction and cash flow.
Even after its steep decline, Telus could still appeal to patient TFSA investors seeking long-term recovery potential, along with attractive dividend income. But I’d definitely avoid counting on its old dividend returning anytime soon.
