Telus this week announced it’s pausing dividend hikes until its share price ‘reflects growth prospects.’Justin Tang/The Canadian Press
Disappointing dividend announcements are piling up, just five years after a rash of high-profile Canadian companies slashed their payouts during the early stages of the COVID-19 pandemic.
This time, though, there’s no bug to blame. Is anything safe?
Telus Corp. T-T is the latest to deliver disappointing news.
This week, the Vancouver-based telecom said that it is pausing dividend hikes until its share price “reflects growth prospects” – a nod to a dividend yield that had spiked above 9 per cent last month as the share price tanked.
The announcement, which interrupted an established track record for twice-a-year distribution increases, came just two weeks after Telus said that its dividend growth plans were unchanged.
Telus adds to a weak stretch for a number of stalwart Canadian dividend payers, dashing confidence in the sort of stocks that many investors have relied upon for regular income.
Allied Properties Real Estate Investment Trust AP-UN-T, an office property owner that has faced high vacancy rates and a big debt load, slashed its distribution by 60 per cent earlier this week.
Northland Power Inc. NPI-T, a former stock market darling for its renewable energy assets and attractive dividend, cut its distribution by 40 per cent in November.
BCE Inc. BCE-T, once the definition of a blue-chip dividend stock, slashed its distribution by 56 per cent in May.
Going back a little further, Algonquin Power & Utilities Corp. AQN-T cut its dividend – twice – by a combined 64 per cent in 2023 and 2024.
Full disclosure: As a glutton for distressed dividends, I own shares in BCE and Telus, as well as units in Allied Properties.
The weak stretch draws from three distinct sectors. Nonetheless, there may be enough in common to give investors something to think about in their approach to dividends.
Rising dividends are great. But are declining dividends okay, too?
For starters, take what management says about payouts with a healthy dose of skepticism.
One minute, they may be talking up their confidence that rising cash flows will be more than enough to cover their debt obligations and support a rising dividend. And the next minute, whack.
Instead, take what the market is saying seriously.
A rising dividend yield – a ratio that compares the annualized payout to the current share price – can be a flashing warning sign that many investors are worried.
That’s especially true today, when falling interest rates should be driving dividend yields down, not up.
Equally important, investors should pay attention to payout ratios, or the percentage of a company’s free cash flow that is going toward dividends.
A number approaching 100 per cent, or exceeding it, is unsustainable over the longer-term. Recent shifts in dividend policies underscore the danger in simply hoping for the best.
They also highlight an issue that should give small investors pause: Dividend sustainability can be a difficult calculation, given the lack of corporate transparency and a number of moving parts.
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“The investor, unfortunately, is left to figure it out for themselves,” said Stephen Takacsy, chief executive officer at Lester Asset Management in Montreal.
There are not only cash flows to consider, but also the impact of dividend reinvestment plans, which pay dividends in the form of new shares and can add another level of complexity.
What’s more, company disclosure on payout ratios can be woefully inadequate and, at times, fundamentally at odds with the less-rosy ratios calculated by outside observers.
“Dividend payout disclosures often rely on company-reported free cash flow (FCF), but because FCF has no standardized definition under accounting rules, issuers have wide latitude in how they present it,” Dan Fong, head of research at Toronto-based Veritas Investment Research, said in an e-mail.
Veritas, which warned investors about BCE’s dividend well before the telecom cut it, has found that some companies exclude costs that should be viewed as part of normal operations. Others might inflate their cash-generation capabilities with one-off gains, which can skew payout ratios in their favour.
“Our analysts adjust reported FCF to align more closely with economic cash-flow reality,” Mr. Fong said.
But dividend-focused investors shouldn’t lose hope.
While dividend cuts – or a pause on increases – can be disappointing, especially for those counting on the income, they can bring a sense of relief, too. Some investors may welcome the greater financial flexibility and see more opportunities for growth.
And look at that: Telus gained 2.1 per cent on Wednesday and Thursday, after it announced its new dividend policy. Sometimes there’s an upside to a sad story.