Telus Faces Scrutiny Over High Dividend Amid Stock Price Drop

Telus is currently facing scrutiny over its high dividend yield, which exceeds eight percent, a sign that investors may perceive elevated risk. According to the Globe and Mail, while the company has consistently raised its dividend twice a year for over a decade, the latest increase was notably modest, suggesting a potential shift towards a more conservative dividend strategy.

Analysts like Liam Gallagher from Veritas Investment Research express concern that Telus does not generate sufficient cash flow to cover its gross dividend obligations, with a payout ratio estimated at about one hundred fifty percent.

This figure includes dividends paid in shares through its dividend reinvestment plan, or DRIP, which is currently offered at a two percent discount. Despite Telus reporting a lower payout ratio of seventy-five percent excluding DRIP shares, the reliance on this plan is seen as dilutive to existing shareholders.

Telus's strategy to gradually reduce the DRIP discount and possibly eliminate it by the end of 2027 could further constrain its financial flexibility, especially if many shareholders opt for cash dividends instead.

Gallagher has downgraded Telus shares to a sell recommendation and reduced his intrinsic value estimate to nineteen dollars per share. Nevertheless, the consensus among ten analysts remains positive, with an average price target of thirty-three dollars.

On November 7, Telus announced its third-quarter results, reaffirming its commitment to dividend growth, albeit at a lower annual increase of three to eight percent from 2026 through 2028. The company states that its dividend decisions will continue to be subject to the board's ongoing assessment of its financial position.

With its elevated yield compared to competitors like Rogers Communications and BCE, Telus's focus on maintaining dividend growth amidst a competitive environment raises questions about its capital allocation strategy.

Some analysts suggest that a pause or reduction in dividend increases could be perceived positively by the market, allowing Telus to prioritize debt reduction and investment in infrastructure. As the telecommunications landscape evolves, investors are advised to consider the implications of dividend policies on long-term financial health.

The focus on 5G network rollouts and mobile technology advancement remains critical, as Telus navigates through these challenges while aiming to sustain its dividend commitments.