Telus (TSX:T) is one of Canada’s most popular high-yield dividend stocks. Having fallen 16% in price this year, it now sports a 6% yield. Not only does Telus have a high yield today, but its management has also been raising the dividend payout over time. Over the last five years, T’s dividend has increased by 6.77% CAGR per year. “CAGR” means compounded annual growth rate. At the rate its dividend has been increasing, Telus will soon be paying a double-digit yield on cost to shareholders who’d bought five years ago.
Of course, that doesn’t necessarily mean that Telus will keep increasing its dividends going forward. Sometimes, companies with stellar dividend-growth track records lose their lustre. With Telus, it appears quite possible that that could occur. The company declared a $0.375 dividend last quarter, when it only earned $0.25 in adjusted earnings per share (EPS).
This would tend to indicate that Telus is paying out more in dividends than it’s earning in profit. So, although T stock’s high yield looks tempting, the company has some financial issues it will have to sort out before its stock becomes truly appealing.
Reasons for Telus’s decline
To gauge whether Telus will be able to turn it around, we first need to know how the company got where it is in the first place. That way, we can tell whether the factors that caused Telus trouble in the past will recur in the future.
One major recent challenge for Telus was the 2022 rise in interest rates. The company has a heavy amount of debt, and servicing all that debt got more expensive when the Bank of Canada raised interest rates.
This fact can be seen clearly in Telus’s third-quarter earnings release. In the quarter, the company paid $307 million in interest, compared to $203 million in interest a year before. That’s approximately a 50% increase. Obviously, when you have a lot of variable-rate debt, you tend to suffer in high-rate environments. This reality reared its ugly head in Telus’s earnings in its most recent quarter.
Positive signs in the most recent quarter
If you look at the previous paragraph on Telus, you might think my opinion on the company is all “doom and gloom.” Telus is drowning in debt in a high-rate environment — what’s to like here?
Actually, there are plenty of things to like about it!
For one thing, the company is still adding subscribers. In the most recent quarter, it added 406,000 total customers, 160,000 net mobile phone customers, and 67,000 fixed customers. On the operational front, Telus is doing great. Eventually, all these new customers are going to show up on Telus’s financial statements in the form of revenue.
For another thing, Telus does not have very many competitors. Unlike the “Wild West” U.S. market, the Canadian telco market is heavily regulated, with enormous barriers to entry. This results in a situation where Telus and a handful of other players are able to set prices for the industry. It also results in high earnings.
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* Returns as of 10/10/23
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