Telus, along with other telecom stocks, recently announced a dividend raise of 3.5%. While this increase may suggest confidence in the company’s future, it is important to consider the fine print. Telus’s latest dividend hike falls short of its target range of 7-10%, and the management has even warned that future dividend increases may not be sustainable beyond 2025.
To assess the sustainability of Telus’s dividend, let’s examine its recent earnings. In the most recent quarter, Telus reported $4.9 billion in revenues, a 12.8% increase from the previous period. However, earnings and free cash flow were lower than dividends paid. With earnings per share at $0.14 and dividends at $0.3636, it is clear that Telus does not have sufficient earnings to cover its dividend payout. Although free cash flow is higher at $0.19 per share, it still falls short of covering the dividend.
While Telus’s dividend coverage raises concerns, it is worth considering the company’s competitive position. In Canada’s telecom industry, Telus faces limited competition from only two major competitors, BCE and Rogers. Entry into the Canadian telecom market is challenging, and US competitors are not allowed to participate. Despite the current dividend sustainability issue, Telus’s relatively strong competitive position suggests that the company may survive in the long term.
Telus has a commendable track record over the past 10 years, with revenue growth of approximately 5.7% per year. Although earnings have remained flat during this period, they have been stable enough to support the dividend. However, it is uncertain whether the dividend will remain the only benefit for investors going forward.
In conclusion, Telus’s dividend hike may not be as bullish as it initially appears. The company faces challenges in sustaining its dividend growth program beyond 2025 due to inadequate earnings coverage. Nonetheless, Telus has a strong competitive position in the Canadian telecom industry, which may provide long-term stability. Investors should carefully consider these factors before deciding whether Telus is a suitable investment option.