Telus has paid out $2.49-billion in common share dividends over the past 12 months.DARRYL DYCK/The Canadian Press
Telus Corp. T-T has a dividend policy that has gone from being a benefit to a burden on the telecom company.
For 14 consecutive years, Telus has boosted its payout to shareholders twice annually, in May and November. The streak made the stock a favourite holding for income-seeking investors. It helped Telus win a premium stock-market valuation compared with peers such as Bell parent BCE Inc. BCE-T and Rogers Communications Inc. RCI-B-T
Earlier this year, Telus pledged to keep handing out ever-increasing amounts of cash by hiking the dividend at a 3-per-cent to 8-per-cent annual clip through to 2028. However, that promise came with caveats, meant to give the Telus board wiggle room on the dividend growth strategy.
Analysts, and the market, say the streak needs to end. This board, chock-a-block with retired bankers, is going to listen.
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On Monday, Telus shares sported a 9.1-per-cent dividend yield – that’s the annual dividend as a percentage of the share price. Yields this high are a flashing red light − a signal the dividend is out of step with the company’s finances.
Telus’ yield is roughly twice that of BCE shares. Back in May, BCE bit the bullet by slashing its payout to pay down debt and fund growth. (The stock price jumped on the news.) Telus shares yield three times what investors receive at Rogers and Quebecor Inc.
Last week, J.P. Morgan Chase & Co. analyst Sebastiano Petti downgraded his recommendation on Telus to underweight from neutral. In a report, Mr. Petti said the change reflects “dividend growth that appears unsustainable.”
The same day, National Bank Financial analyst Adam Shine compared Telus’ options to what played out at BCE and said: “We’d expect a change in the policy growth range before a cut to the dividend.”
In other words, Telus might not just slow the growth of its payout. Mr. Shine is warning income-seekers a reduction in the dividend is possible.
Over the past 12 months, Telus disclosed it paid out $2.49-billion in common share dividends, which amounted to 106 per cent of its cash from operating activities, after capital expenditures. Using the company’s metrics, Mr. Petti said the dividend payout will remain above 100 per cent for the next five years.
Telus chief executive officer Darren Entwistle is trying to square a circle. The telco is committing to boosting dividends. At the same time. Mr. Entwistle needs cash to pay down debt, make tuck-in acquisitions, such as the recent takeovers of Telus Digital and health services platform Workplace Options, and fight a street-by-street battle for customers with Bell, Rogers and Quebecor.
In August, Telus raised $1.26-billion by selling a minority stake in its cellphone tower network. Mr. Petti said the company needs to auction off more assets or sell a stake in a division such as Telus Health to hit its self-imposed debt targets. He estimated Telus will be $3.6-billion short of its lower leverage goal at the end of 2027.
Which brings us back to the caveats on Telus’ long-running dividend growth strategy.
In November, when Telus renewed its vow to boost its payout by 3 per cent to 8 per cent each year, the company’s management’s discussion and analysis (MD&A) filing contained warnings the streak could end at any time.
“Notwithstanding this target, dividend decisions will continue to be subject to our board’s assessment and the determination of our financial position,” Telus said.
A few lines later in the MD&A, the company said: “There can be no assurance that we will maintain a dividend growth program or that it will be unchanged through 2028.”
These lines hint at a potential path forward for Telus board members such as retired bankers Victor Dodig, who had been CEO at CIBC, ex-ATB Financial boss David Mowat and former Bank of Montreal chief financial officer Tom Flynn. These are executives who spent their careers making smart decisions on capital allocation.
With a yield north of 9 per cent, well above that of its peers, Telus pays a dividend that no longer supports its stock price. Continuing to boost the payout is a poor use of precious cash.
Earlier this month, another income-spinning company, Northland Power Inc., shocked investors with a 40-per-cent dividend cut. Like BCE, Northland’s board made the move to preserve the renewable energy company’s financial flexibility.
No one should be surprised if Telus drops a dividend strategy that no longer suits the times. Maintaining a 14-year growth streak for its own sake does nothing for Telus shareholders.