A Yield Near 10% May Signal Caution Despite Strong Cash Flow Projections
Key Numbers
- 9.6%: Current dividend yield.
- $2.15 billion: Expected free cash flow for 2025.
- 30%: Total share price decline over the past five years
Telus Corp. (TSX:T)(NYSE:TU) has officially hit the pause button on its multi-year dividend growth program, choosing to maintain its quarterly payout at 41.84 cents per share. This decision comes as the telecommunications giant seeks to stabilize its balance sheet and wait for its share price to better reflect its long-term growth prospects while it also begins to phase out its discounted dividend reinvestment plan by 2028.
For years, the company has consistently raised its dividend, but with the stock down more than 30% over the last five years, management is shifting focus toward capital allocation and deleveraging through a targeted 10% annual free cash flow growth rate through 2028.
The high yield, which currently sits at approximately 9.6%, has arguably become its own hurdle. When a dividend yield reaches such extreme levels, it often raises red flags for investors who worry about the sustainability of the payout or the lack of incentive for further hikes. Management’s decision to pause increases suggests a realization that a higher payout might not be the best use of capital at this stage. Instead, the company is prioritizing its plan to reduce its net debt to EBITDA leverage ratio to roughly 3.0 times by the end of 2027.
In addition to the dividend pause, Telus is beginning a systematic phase out of its discounted dividend reinvestment plan. The current 2% discount will be gradually reduced starting in 2026 before being eliminated entirely by 2028. This move is designed to reduce share dilution and improve the company’s cash dividend coverage. Despite the pause in growth, the company remains optimistic about its underlying financials, projecting $2.15 billion in free cash flow for 2025 and a minimum 10% compounded annual growth rate through 2028.
While the dividend remains safe for now, it’s clear that management is getting more cautious about it. A dividend cut may not be on the horizon just yet, but if Telus’ financials don’t improve as expected, then an adjustment may be inevitable.