If you’re looking to buy a Canadian dividend stock that offers a generous yield, Telus (TSX: T) is still worth considering, even after cutting its dividend earlier this year.
In fact, it currently yields roughly 6.2%, meaning a $10,000 investment could generate about $620 in annual dividend income at the current payout.
However, anytime a company cuts its dividend, especially by such a significant amount, it’s understandable to wonder how much confidence you can have in the new payment.
After all, a high yield is only useful if the business can keep generating enough cash to support it while still investing in its operations.
The good news is that Telus’s new, much smaller dividend leaves it with considerably more room to strengthen its balance sheet. So, here’s how sustainable the new payout looks and what buying the stock today could mean for your passive income.
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Is Telus’s new dividend safe?
As most Canadian investors know by now, Telus cut its dividend by 55% in July, a move that had been looking increasingly likely for months. Years of heavy spending on its fibre and 5G networks, along with acquisitions, had left Telus with a significant debt load and an overstretched payout.
So, with new CEO Victor Dodig prioritizing debt reduction, the smaller dividend also allows Telus to keep more cash available to strengthen its balance sheet.
That not only helps make its dividend more sustainable in the near term, but also gives the company more flexibility to invest in growth over the long haul.
For example, based on its share count reported at the end of July, the new dividend would cost roughly $1.2 billion annually. Meanwhile, even after lowering its outlook, management expects Telus to generate approximately $1.8 billion in free cash flow this year.
That means a full year of dividends at the new rate would use roughly two-thirds of that cash, leaving a meaningful amount available to pay down debt and strengthen the business.
That’s especially important because Telus still has a significant debt load. Its net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio was 3.5 times at the end of June, and management is targeting roughly three times or less by the end of 2028.
A defensive business with long-term growth potential
While Telus clearly needed to improve its financial position, the business still provides essential phone and internet services that Canadians rely on every day.
That gives it a massive base of customers generating recurring revenue, which is one of the biggest reasons telecom stocks can be such reliable long-term investments.
Furthermore, although building and maintaining those networks requires a tonne of money, it also makes competing with an established company like Telus considerably harder.
And with its major fibre build approaching completion, management expects capital spending to take up a smaller proportion of revenue over the coming years. That could help Telus keep more of the cash its operations generate, supporting further debt reduction.
At the same time, it still has opportunities to expand its business, including through Telus Health’s healthcare software, employee assistance programs and benefits services.
Plus, Telus is building a business supplying computing capacity for artificial intelligence. Its facility in Rimouski, Quebec, allows businesses to develop and run AI applications while keeping their data in Canada, and Telus reported that it was operating at full capacity in its second-quarter update.
That gives Telus another opportunity to generate revenue from the infrastructure it has been investing in for years.
And as its finances improve now that its dividend is much more sustainable, it can put itself in a better position to pursue those opportunities and eventually start growing its dividend again.
