Telus shares closed at $18.84 on the Toronto Stock Exchange on Thursday.Justin Tang/The Canadian Press
Telus Corp. T-T shares sank more than 5 per cent this week after a downgrade by JP Morgan after concerns over the sustainability of the company’s dividend growth, heightened competition from rivals and its capital allocation strategy.
On Tuesday, JP Morgan analyst Sebastiano Petti downgraded Telus from a neutral to an underweight rating, and lowered its price target for the telecom from $22 to $19.
After Mr. Petti’s note, the stock dropped 5.3 per cent to $19 on Tuesday. Telus shares have continued to decline slightly since then, closing at $18.84 on the Toronto Stock Exchange Thursday.
“While Telus has strongly signalled its intent to maintain a dividend growth strategy, we believe the current dividend yield of 8.3 per cent already reflects some uncertainty regarding the sustainability of that investment thesis,” Mr. Petti said. “A further slowdown in dividend growth makes sense at this point given Telus’ leverage.”
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In May, the company said it would slow its dividend growth over the coming years. It is targeting 3-per-cent to 8-per-cent growth annually from 2026 to 2028, with a payout ratio target of between 60 per cent and 75 per cent of free cash flow annually.
In his report, Mr. Petti estimated Telus’s dividend payout will exceed 100 per cent of free cash flow through 2030, without providing a detailed explanation.
However, in an interview Thursday, Telus chief financial officer Doug French said the company expects to end 2025 with a ratio of about 75 per cent, and to remain close to its target in the coming years. The company intends to remove the discount on its dividend reinvestment plan in 2027.
Telus calculates its payout ratio as annualized cash dividend divided by free cash flow, with the latter including full leasing costs and capital expenditures, Mr. French said.
When setting the dividend growth target, Mr. French said, the company “took into consideration the strength of our business operations, the strength of our monetization opportunities, and a projection of cash flow that would substantiate keeping the dividend in our objective.”
In his report, JP Morgan’s Mr. Petti said he was encouraged by Telus’s monetization of a minority stake in its cellphone tower business. However, he said the downgrade was owing to slower telecom growth, competition from rival BCE Inc. BCE-T, and increased capital expenditures related to the towers and the health division.
Mr. French said the wireless market is now “a little more stable than it has been for a while,” and that while Bell is expanding into Telus’s territory, Telus is simultaneously doing so over Bell’s network, where there is a significantly larger population. He also said the JP Morgan report underappreciates the company’s international growth opportunities, including of its health care assets.
Mr. Petti is not the only analyst who has raised concerns about Telus’s dividend. Liam Gallagher, analyst at Veritas Investment Research, said in a Nov. 11 report that he was concerned about Telus’s ability to generate enough free cash flow to cover its dividend, particularly as it plans to remove the discount on its dividend-reinvestment plan or DRIP by the end of 2027. He estimated it currently saves about $800-million in annual cash dividends.
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Meanwhile, analysts from the Big Five banks rate the stock as buys.
RBC Dominion Securities Inc. analyst Drew McReynolds called Telus the “premium-valued structural leader” in a note to investors following the company’s quarterly earnings. And Scotiabank analyst Maher Yaghi said the company’s “strong cost control” was offsetting topline pressures, and that Telus Health had demonstrated strong progress on growth and profitability in the quarter.
Meanwhile, on Wednesday, National Bank analyst Adam Shine raised his rating for Telus to “outperform” from a neutral rating, but dropped his price target from $23 to $21. “We’d expect a change in the policy growth range before a cut to the dividend,” he said in a note to investors.
This is the second telecom company to attract attention this year because of its dividend. In May, BCE halved its dividend payout – which at the time had a yield of 13 per cent, widely seen as unsustainable – in order to allocate that cash elsewhere.