Telus Dividend Safety: Is the Stock Still Worth Buying for Income?

Explore the latest insights on Telus dividend amid a challenging earnings report and management’s new Transformation Strategy.

Puja Tayal

Author Bio

Puja Tayal grew up in a small-business family where dinner conversations often centred on working capital and savings. Her early experiences with investing, particularly during the 2008 financial crisis, shaped her approach to understanding markets and evaluating investment opportunities. She began her career at a mutual fund company before moving into investor education and financial writing for asset and wealth management firms. Before joining The Motley Fool, Puja wrote for Market Realist, where she extensively covered the semiconductor industry. Her published work has also appeared in The Indian Express. Puja believes every stock has a story that can help investors understand its potential returns. She combines business analysis with different investing approaches to help investors make informed decisions and align their portfolios with their long-term financial goals. Outside of finance, Puja enjoys long drives, catching up with friends, watching superhero and science-fiction movies, and managing her family portfolio. She also has a keen interest in artificial intelligence and its potential to reshape the world.

Education

Bachelor's degree in Accounting and Finance, University of Mumbai (2007)
CFA Level I

Areas of Expertise

Qualitative company analysis, management strategy, risk assessment, long-term investing, portfolio diversification and rebalancing, dividend reinvestment, cyclical growth opportunities, compounding strategies, growth stocks, and dividend stocks.

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Favorite Investment Quote

"Risk comes from not knowing what you're doing." — Warren Buffett

Published November 9, 9:00 pm EST

Telus Corporation (TSX: T) stock fell 2.9% after the third-quarter earnings release on November 6. The dip came on the initial response to a 33% year-over-year decline in earnings per share (EPS) to $0.16 due to an $800 million goodwill impairment of TELUS Health. However, the new management presented a Transformation Strategy that addresses the pressing issue of a fine balance between debt reduction and growth investment. If you are in it for the long term, Telus is a stock to add to your watchlist and monitor the strategy execution.

But if income is on your mind, Telus’s dividend is still not out of the woods.

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies." — Source: Getty Images

What is Telus doing to make its dividend safe?

Telus is using a two-pronged approach to safeguard its dividend: reduce debt and invest in growth.

To reduce debt, it is looking to monetize its non-core businesses of TELUS Health and TELUS Agriculture & Consumer Goods. In the earnings call, CEO Victor Dodig stated that it is in an advanced stage with a prospective buyer for one asset in the health portfolio. Telus is also looking to streamline and improve business processes to unlock $900 million in annual cost savings by the end of 2028.

But what caught my attention the most was the equitization of its PureFibre network.

Going back to its roots: Equitizing PureFibre network

In a world where space internet and artificial intelligence (AI) are stealing the limelight, Dodig is eyeing unlocking the equity value of Telus’s core strength, the PureFibre network. Even today, the fibre network is “the gold standard for broadband connectivity, delivering capabilities that alternative technologies, including cable and satellite, simply cannot match,” said Dodig in the earnings call.

The regulatory change opened PureFibre network to competitors, allowing them to lease the network. Dodig is looking to unlock value from its fibre infrastructure the way it did with its wireless tower infrastructure through Terrion.

Telus created a wireless operator company, Terrion, and sold a 49.9% equity interest to institutional investor La Caisse for approximately $1.26 billion. It used the money to reduce debt. The way Terrion operates, Telus manages mobile network coverage, reliability, and superiority, while La Caisse manages infrastructure development, site management, and third-party co-location. There is recurring income coming from Terrion, but the capital locked in the infrastructure was released.

If Telus manages to successfully unlock equity value from PureFibre, its balance sheet could strengthen significantly. So far, the company maintains its target to achieve 3 times net debt-to-adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by 2028 from 3.6 times at present.

What should investors expect from Telus?

Telus has once again presented a practical and strong transformation strategy. The attention will be on its execution, for which management has also given three key metrics to watch for in every earnings report:

Free cash flow growth of 10%
Dividend payout ratio of 60% or lower
Leverage ratio of 3.6x or lower.

There could be some quarters wherein Telus reports revenue declines and net losses as it implements the transformation strategy. As long as the three key metrics are on track, the long-term recovery and a 5.9% yield could be the reason to hold.

Protect your portfolio from a downside

However, let us not rule out the possibility of execution falling apart, and the stock price falling further or the company pausing dividends. Unless balance sheet strength returns, Telus stock has a downside risk. Consider protecting your portfolio from the short-term downside of Telus with a safer dividend stock like CT REIT. More than 90% of its debt is from unsecured debentures of parent company Canadian Tire. The kind of debentures it has issued does not create a repayment obligation. They are renewed with a new yield. Moreover, CT REIT has a dividend payout ratio of 72.5%.

With CT REIT, you get a 3% bonus on DRIP shares, a 3% average annual dividend growth, and a 5.4% annual yield. All the incentives Telus stopped are available in CT REIT.