In the world of investing, few things are as enticing as a high dividend yield. But when it comes to Telus, Canada's telecommunications giant, a seemingly generous 11.2% annual dividend yield raises more questions than it answers. As an investor who has had less-than-stellar experiences with Telus, I'm here to share my thoughts on why this dividend story might not be as rosy as it initially appears. Let's dive in!
The Dividend Dilemma
At first glance, Telus' dividend yield is eye-catching. But, as the saying goes, 'looks can be deceiving'. The key to understanding this lies in the company's financial health and its dividend payout ratio. When a company pays out more in dividends than it earns, it's a red flag. And that's exactly what we're seeing with Telus.
The issue is further compounded by the fact that Telus' dividend payout ratio varies depending on the accounting metric used. Using earnings as the basis, the payout ratio seems astronomically high at 278%. But, as we all know, earnings can be manipulated, and in the case of Telus, there are significant non-cash charges like depreciation expenses and restructuring costs that skew the picture. Free cash flow, on the other hand, provides a more accurate measure of dividend sustainability.
And here's where it gets interesting. Based on unadjusted free cash flow, Telus is paying out a staggering 110%. But, if we factor in the company's dividend reinvestment plan (DRIP), which is being phased out, the payout ratio drops to a more manageable 75%. While this is an improvement, it still indicates that Telus is stretching to maintain its dividend payments.
A Familiar Tale
This situation is not unlike what we saw with BCE, another Canadian telecom giant. BCE's dividend growth stalled, the yield climbed into double digits, and investor confidence eroded. Eventually, the dividend was cut by 50%, and the yield adjusted lower as expectations reset. While I'm not predicting an exact repeat of BCE's story, Telus' current situation has many of the hallmarks of a classic falling knife.
The Risk-Reward Dilemma
So, is Telus a buy? Personally, I would approach with caution. The company's focus on improving its balance sheet and reducing net debt-to-EBITDA is a positive step, but it's not enough to convince me that the risk-reward is attractive. For investors seeking dependable dividend income, I'd recommend looking elsewhere, perhaps to Canada's banks or pipeline companies, which appear to offer stronger fundamentals over both the short and long term.
The Bottom Line
In my opinion, Telus' dividend story is a cautionary tale. While the company's efforts to improve its financial health are commendable, the current situation raises concerns about dividend sustainability. For now, I'd advise investors to proceed with caution and consider alternative options that offer a more stable and secure income stream.
