Telus Cut Its Dividend: At a 7.4% Yield, Here's the Case for Buying Now

Telus Cut Its Dividend: At a 7.4% Yield, Here’s the Case for Buying Now

TELUS cut its dividend by 55%, yet shares yield 7.4%. See what the dividend reset means for income investors and whether the stock is a buy now.

Aditya Raghunath

Aditya Raghunath joined the Motley Fool Canada team in 2019 and has close to seven years of experience in covering publicly-listed companies. With a post-graduate degree in finance, Aditya aims to educate and engage Canadians by writing extensively about growth, dividend, and value stocks. If you are considering investing in the stock market, he recommends reading The Intelligent Investor by Benjamin Graham before taking the plunge.

Published October 14, 8:30 pm EDT

In July, Victor Dodig stepped onto his first earnings call as CEO of TELUS (TSX: T). He spent 11 years running CIBC and now had to tell dividend investors something they didn’t want to hear.

The Canadian telecom giant was forced to slash its dividend payout as it wrestles with sluggish growth and high debt levels. Despite the cut, the TSX dividend stock offers shareholders a 7.4% yield in October 2026, making it attractive to income-seeking investors.

Before the dividend cut, Telus raised its annual dividend from $0.50 per share in 2010 to $1.67 in 2026. Now, it will pay a quarterly dividend of $0.19 per share, for an annual payout of $0.75 per share.

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Why the TELUS dividend cut happened

TELUS spent heavily to build its PureFibre and 5G networks, mostly funded with debt. It ended Q2 with a net debt ratio of 3.5 times, down from 3.7 times in the year-ago period.

Dodig said lower immigration has shrunk the pool of new wireless customers across all carriers. TELUS Digital also stumbled as big clients automated services like content moderation faster than expected, which forced a $2.1 billion noncash impairment.

The impairment led to a net loss of $1.8 billion.

Service revenue fell 1% to $4.4 billion, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) declined 2% year over year.

Management also reset the free cash flow outlook lower to $1.8 billion, from an earlier estimate of $2.45 billion, forcing a dividend cut.

TELUS also tightened its payout policy. It will now pay out 45% to 60% of trailing 12-month free cash flow, down from 60% to 75%.

The dividend cut frees up about $2.7 billion through 2028, which it will use to reduce debt. TELUS aims to end 2028 with a leverage ratio of three times or lower, a year later than the original plan.

Is TELUS stock a buy after the dividend cut?

The case for buying rests on the core telecom business, which looks steadier than the headlines.

Mobile network revenue rose 1% to $1.7 billion. It was the third straight quarter of growth.

Average revenue per user (ARPU) fell only 0.4% to $56.36, the fifth straight quarter of improvement. Free cash flow rose 2% to $545 million.

CFO Gopi Chande said adjusted EBITDA was stable without other income. He called it proof of the telecom business’s resilience.

Dodig expects free cash flow to grow at least 10% a year, compounded, over 2027 and 2028. The CEO said he is holding himself accountable to that figure.

Additionally, TELUS and AST SpaceMobile completed their first satellite-to-smartphone test, and service is expected to begin within the next year.

Dodig stated:

I see it as a bit of an abbreviated detour. And I say abbreviated because we’re going to work pretty intensely in course correcting and transforming our company over the next little while.

Risks to weigh before you buy TELUS stock

This is not a risk-free turnaround. Chande said the second half will be weaker for TELUS Digital.

Capital spending will also rise to about $2.6 billion from $2.3 billion. And Dodig won’t share his full cost-savings plan until the November earnings call.

In other words, the turnaround story is still being written.