Outlook brightens for Telus

Telus (TSX:T) shareholders haven’t had much to cheer about in the last few years as the value of their investment has steadily declined.

In the five years between mid-November 2020 and the first week of this month, the shares had fallen 18.5% to the recent price of $20.38.

The better news is that dividends have increased by between 6% and 7% a year in each of those years. When that is taken into account, and assuming the dividends were reinvested, the total return is a decline of between 1% and 2%.

It offers an example of why dividends are so important to long-term investing success. The dividends have offset most of the share price decline, albeit before inflation, but they leave shareholders with very close to breakeven over the five-year period. They can wait for the shares to recover in the meantime.

Analysts believe better things lie ahead for Telus and the sector.

Telecom companies borrow a lot of money for their infrastructure upgrades, so were hurt by aggressive interest rate increases in 2022 and 2023. Telus has $27.3 billion in long-term debt which it incurred in part to upgrade its 5G and fibre networks. That cycle has finished but the company has yet to benefit from the upgrades. 

Canada has also done a U-turn on its immigration policy. It is reducing permanent resident targets after years of record‑high admissions. A phone plan and internet connection are vital to newcomers to stay in touch with family, look for work, and enjoy cheap forms of entertainment. That tailwind has eased.

A third pressure has been Quebecor (TSX: QBR.B), which has ambitions to become the fourth national telecom company. It acquired Freedom Mobile in 2023 and is expanding its 5G network. As it does so, the CRTC is requiring Telus, Rogers, and BCE to allow Quebecor to use their networks. 

Investors have applauded Telus’s dividend strategy but are wondering how long it can last. Telus has increased its dividend twice a year since 2011, delivering 27 consecutive semi‑annual increases as of mid‑November. That is one of the best records on the TSX, but analysts worry it is not sustainable. Its payout ratio is over 100%, which means it is paying out more in dividends than it has cash to cover them as it awaits the benefits from its system upgrades.

In its latest quarter, Telus indicated that dividend increases are slowing. Along with its earnings, it declared a dividend increase of 4%, compared with a 7% increase in the previous quarter.

In 2027 it will also remove the discount on its dividend reinvestment plan (DRIP). The discount is roughly 2% and allows shareholders to reinvest their dividends at a low price rather than take cash.

These worries are among the reasons the share price is depressed. As a result, the dividend yields a lofty 8%.

Looking ahead to 2026, RBC Dominion Securities analyst Drew McReynolds and his team believe the sector has passed through the trough and should see modest recovery. Less capital spending will allow Telus and the other players to recoup their investments. Mr. McReynolds sees Telus outperforming its peers with revenue growing 2% – 4% next year and earnings before interest and taxes by 3%-5%. He sees the shares trading at $24 a year from now, 16% higher than the current level.

Morningstar Research analyst Mathew Dolgin thinks Telus’ wireline unit is its standout business. Wireline includes internet, landline phones, and TV. They come into your house through fibre‑optic and coaxial cables. He believes its recent investments in this area have “set Telus up for a prolonged period of success.”

Mr. Dolgin estimates Telus has a 27% share of the Canadian wireless market and doesn’t see Quebecor as a significant threat. The Big Three haven’t lost much market share to Quebecor, he says, but have been forced to match its prices, leading to lower revenue per subscriber. Telus confirmed this pressure in its third quarter. It said it averaged 2.8% less revenue per user from mobile phone services as it matched price cuts.

In Mr. Dolgin’s opinion, Telus’ forays into health, security, and agriculture have produced mixed results. They have potential but a high degree of uncertainty and are not generating much profit. Telus reported revenue growth of 18% in Telus Health to $1.2 billion in the latest quarter with a loss of $22 million in earnings before interest and taxes.

Mr. Dolgin sees the spending on health and agriculture as a far riskier bet than using the money to pay down debt and buy back stock while share prices are low. He also wonders about the commitment to increase dividends every year, given these other demands.

Even with these cautions, Mr. Dolgin estimates that a fair value for the shares is $30, about 33% higher than its recent level.

Telus reported third quarter earnings on Nov. 7. The results showed a 68% increase in net income to $431 million because of a one-time gain from a debt repurchase. Excluding the gain, net income fell about 10% year‑over‑year to $370 million. Revenue was flat at $5.1 billion, though the company added more internet customers than expected. The dividend was raised for the second time this year.

This article appeared in a recent issue of the Income Investor.  For information on how to reprint this article please view this page.