Analyzing Telus’s Impressive Dividend Growth in Detail
Telus Corp. is gaining attention for its notable dividend growth amid growing market scrutiny. With current shares yielding over 8%, the sustainability of this dividend is under debate among investors and analysts.
Understanding Telus’s Dividend Growth
Telus has maintained a habit of increasing its dividend twice yearly since 2011, typically in May and November. On November 7, the company announced a 4% increase for the third quarter compared to the previous year. The new quarterly dividend is set at 41.84 cents per share, marking a marginal increase of just 0.5% from the previous quarter. This increment is the smallest since the company began its semi-annual dividend program, excluding a missed increase in 2020 due to the pandemic.
Market Reactions and Analyst Concerns
Investor confidence appears shaken due to rising debt levels and questions surrounding dividend sustainability. Liam Gallagher, an analyst with Veritas Investment Research, described the latest increment as “ill-advised.”
- Telus reported generating approximately $1.6 billion in free cash flow last year.
- The total dividend payout for that period was around $2.5 billion, resulting in a payout ratio of approximately 150%.
This ratio includes dividends paid in shares as part of the company’s Dividend Reinvestment Plan (DRIP), which offers a 2% discount. While Telus’s own calculations indicate a more favorable payout ratio of 75% when excluding DRIP shares, Gallagher argues this may misrepresent the true financial health of the firm.
Future Plans and Financial Strategy
Despite the recent scrutiny, Telus aims to continue its dividend growth trajectory. However, it plans to reduce future increments to a range of 3% to 8% annually from 2026 to 2028, a decrease from the prior 7% to 10% forecast from 2023 through 2025.
The board will regularly evaluate the company’s financial situation when determining the dividend. Telus has stated intentions to gradually eliminate the DRIP discount by the end of 2027, though this transition could further affect its financial flexibility.
Analysts’ Perspectives
Currently, Telus holds various ratings from analysts, with 10 holds and seven buys according to LSEG data. The average 12-month price target for the stock stands at $23. However, Gallagher has downgraded his assessment, reducing his intrinsic value estimate for Telus shares to $19.
Dividends Compared to Competitors
Despite uncertainties, Telus maintains a dividend yield that significantly outpaces competitors like Rogers Communications, which offers a 3.7% yield, and BCE, which recently cut its dividend to yield 5.4%.
While Telus remains in a challenging financial position, focusing heavily on debt reduction may allow for more sustainable growth moving forward. Investors should view potential pauses or reductions in dividend growth not as a negative but as a prudent strategy to enhance financial strength.
