If you’re considering Telus (TSX: T) for dividend income today, there’s certainly a lot to like about a stock yielding roughly 6.1%, especially one that provides essential phone and internet services to millions of Canadians.
However, what makes Telus particularly interesting right now isn’t just the income you can earn. It’s how the company is changing the way it uses its cash, and why that could make it a better long-term investment.
After years of spending heavily to grow its networks while continuing to increase its dividend, Telus is now prioritizing reducing debt and rebuilding its financial flexibility.
And while that means investors shouldn’t expect the dividend growth they were used to, it could ultimately be a more attractive approach, especially with new opportunities emerging across the telecom industry.
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Why Telus had to rethink its dividend
One of the biggest challenges for Telus in recent years has been balancing the cost of expanding its business with the cash it returns to shareholders.
As Canadian telecom companies raced to build out their 5G and fibre networks, Telus invested billions in new infrastructure and spectrum. That spending wasn’t optional if the company wanted to remain competitive and protect its market share.
In fact, Telus spent roughly $7 billion on capital expenditures over 2021 and 2022 alone, before even accounting for the cost of spectrum licences.
But as its debt grew, interest rates rose too, making that borrowing more expensive. Meanwhile, Telus continued increasing its dividend, leaving less cash available to strengthen its balance sheet.
So although the 55% dividend cut announced in July can look ugly on the surface, it wasn’t a sign that Canadians had suddenly stopped using its services. Instead, it was Telus recognizing that it needed to keep more of the cash it generated to strengthen its finances, and the numbers help explain why.
Management now expects roughly $1.8 billion in free cash flow for 2026, while the reduced dividend would cost approximately $1.2 billion over a full year. So while Telus is still expected to pay out about two-thirds of its expected free cash flow, that’s considerably more manageable than the previous payout.
In other words, I think the new dividend looks much safer today, even if investors shouldn’t expect big increases anytime soon.
Plus, Telus expects the reset to free up roughly $2.7 billion through 2028, giving it more cash to put toward debt reduction.
Why a smaller dividend could be better for investors
What’s especially important is that improving the balance sheet isn’t just about making Telus’s current dividend safer. After all, telecom businesses constantly need to invest in their networks and technology.
And while the company’s major fibre build is approaching completion, that doesn’t mean its opportunities to invest are disappearing.
In fact, Telus is already expanding into sovereign AI infrastructure, including data centres that can provide computing capacity to businesses developing artificial intelligence applications.
That creates a significant opportunity, but it also shows why having a healthier balance sheet matters. The less cash Telus has committed to servicing debt and paying an oversized dividend, the more flexibility it can eventually have to pursue projects that could generate higher returns over the long haul.
For now, though, reducing debt remains the immediate priority. At the end of June, Telus’s net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio stood at about 3.5 times, and management wants to bring it down to three times or less by the end of 2028.
Of course, Telus still has work to do. Its debt remains elevated, and improving free cash flow will be important if the company wants to continue strengthening its balance sheet while investing in new opportunities.
However, with a yield still above 6%, a much more manageable payout and a business that continues to generate recurring revenue, I think Telus is worth considering for patient income investors today.
And while it may be some time before dividend growth returns, a healthier balance sheet and more opportunities to invest in its future could ultimately make Telus a much more attractive stock to own over the long haul.
