I read in one of your recent columns that you sold BCE Inc. personally and in your model dividend portfolio. But what are you planning to do with Telus Corp.? Its stock has also been hit pretty hard.
This will likely be another tough year for Canadian telecoms, but I’m not throwing Telus out with the BCE bathwater.
Telus (T) and BCE (BCE) have plenty in common. Both have seen their wireless profit margins squeezed by intense promotional activity, particularly from Quebecor Inc.’s discount brands, Freedom Mobile and Fizz. The two legacy carriers are also facing a pronounced slowdown in immigration levels that will limit the supply of new customers, turning what had been a tailwind for the sector into a headwind.
This one-two punch has delivered a sharp blow to Telus’ share price, which has skidded about 18 per cent in the past year. The drop has pushed Telus’ yield – which moves in the opposite direction to the share price – to about 8 per cent, which is causing some investors to worry that the dividend could eventually be cut.
I don’t want to sugar-coat the challenges Telus is facing. But I believe there is a case to be made that the stock is at or near a bottom and, for patient investors, could deliver a solid return from a combination of the outsized dividend and modest potential capital growth.
Here are a few reasons I’m holding on to my Telus shares.
The dividend appears to be safe …
BCE has said it will not raise its dividend in 2025, ending years of dividend increases. With BCE’s balance sheet under pressure and the stock now yielding about 12 per cent, many analysts expect the company to cut its dividend next year.
That’s not the case for Telus. When it released third-quarter results in November, Telus raised its dividend by 3.4 per cent which, on top of a similar raise announced in May, brought the cumulative increase in 2024 to 7 per cent. That’s in line with Telus’ current dividend growth guidance of 7 to 10 per cent annually through the end of 2025, which many analysts expect the company to deliver.
“We expect Telus will continue to prioritize dividend growth, and we are expecting 7-per-cent dividend growth in 2025,” Stephanie Price, an analyst with CIBC World Markets, said in a research note this month.
… even as dividend growth could slow
However, given that the company is paying out more than 100 per cent of its free cash flow when one excludes its dividend reinvestment plan (which pays shareholders in shares instead of cash), Telus could – or perhaps should – reduce its projected growth rate when it unveils new dividend guidance later this year, some analysts say.
“Annual dividend increases post-2024, despite an apparent corporate desire to stay at 7 per cent, would be more prudent closer to 3 per cent,” Adam Shine, an analyst with National Bank Financial, said in a note to clients.
One reason Telus can afford to continue raising its dividend is that the company’s cash flow is poised to grow, thanks in part to the completion of its fibre rollout. According to Mr. Shine’s financial model, Telus’ normalized free cash flow is expected to rise to an estimated $2.86-billion by 2027, up from about $2.17-billion in 2025, which would bring the payout ratio down to about 106 per cent from an estimated 116 per cent this year. Including the company’s dividend reinvestment plan, Mr, Shine is modelling a dividend payout ratio of 71 per cent on a cash basis in 2027.
Tax-loss selling season is over
Telus’ stock was hit especially hard in December, when many investors typically sell their dogs to claim a capital loss for tax purposes. But since tumbling more than 10 per cent last month, the stock has stabilized and is even up slightly this year. That’s not to say it couldn’t fall further, but with tax-loss selling out of the way, a major drag on the stock has been removed.
The wireless market may be getting more rational
Most analysts agree that the wireless marketplace can’t support such excessive discounting and promotional activity forever. Thankfully for telecom investors, some rationality appears to be returning to cellphone and internet plan pricing.
“We see potential for the industry to take one small step for growth, and possibly one giant leap for sentiment, reflecting … the flow-through of more disciplined wireless and internet pricing behaviour that began in earnest” in the second half of 2024, Drew McReynolds, an analyst with RBC Dominion Securities, said in a research note. An improving economy, bolstered by further interest rate cuts, should also help to counter negative sentiment toward the sector, he said.
More than a wireless company
Telus has other potential growth drivers in its back pocket. These include technology subsidiaries such as Telus Health and Telus Agriculture & Consumer Goods, which it could eventually take public.
What’s more, with Telus having replaced copper wire infrastructure with faster and more reliable fibre-optic cables, the company is sitting on a large bank of real estate that’s no longer required to run its networks. The company has mused publicly about unlocking $2-billion to $3-billion of gross value by redeveloping its surplus properties and potentially spinning them off as a real estate investment trust. Telus is also aiming to sell its old copper wire, which could bring in hundreds of millions of dollars over the next several years.
Closing thoughts
These are challenging times for Canadian telecoms, but most of the bad news may already be baked into Telus’ share price. With its attractive dividend yield, growing cash flow and potential to create value from non-core businesses and assets, the company should be able weather the competitive storm in the wireless industry and ultimately emerge in a stronger position. Be sure to do your own research before investing in any security.
Disclosure: The author owns Telus shares personally and in his model Yield Hog Dividend Growth Portfolio.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.