Telus (TSX:T), a prominent player in the Canadian telecommunications industry, has long been viewed as a reliable dividend stock. However, current fundamentals and market conditions raise significant concerns about its stability and future performance. That’s why, today, we’re going to go through a few reasons why even with a 7.1% dividend yield, investors may want to reconsider their position in Telus stock.
First, the dividend
Telus stock offers an attractive dividend yield of 7.1%. However, a dividend cannot be paid if the company is paying out more in dividends than its earnings. This is where the payout ratio comes in.
Right now, the company’s dividend payout ratio is alarmingly high at 284%. This indicates the company is paying out more in dividends than it earns. This practice is unsustainable in the long term and raises red flags about the its financial health and ability to maintain such a high dividend payout. Especially without resorting to borrowing or dipping into reserves.
Debt concerns
Another concern for investors is the company’s debt. Telus stock cannot continue to support a high dividend after all if it can’t even borrow money, which it has been doing at a high rate.
Telus stock has been aggressively expanding its operations and investing in new technologies, such as 5G networks and home security services. While these investments are crucial for future growth, they have significantly increased the company’s debt levels. Currently, the company trades at a 1.7 debt-to-equity (D/E) ratio. This would indicate that it would need 171% of its equity to cover its debts.
High debt can strain financial resources, especially in an environment of rising interest rates. This makes it more challenging for Telus to service its debt while maintaining dividend payments and funding capital expenditures.
Valuation
Then we have the overall valuation concerns over Telus stock. Telus’s current valuation appears stretched when compared to its peers. Despite its high dividend yield, the company’s price-to-earnings (P/E) ratio is trailing at 42.1. Furthermore, there are other valuation metrics suggesting that it may be overvalued relative to its growth prospects and financial health. This overvaluation can limit the stock’s upside potential and increase the risk of price corrections in the future.
Finally, this valuation may only become more strained. That’s because Telus stock has been seeing its earnings performance dwindle lately. After hitting revenue of over $5 billion, this shrunk back down in the first quarter. Meanwhile, net income dropped to half of what it earned in the fourth quarter of 2023 compared to the first quarter of 2024. If a company wants to keep paying a dividend, it needs to earn. And that doesn’t look too promising at this point.
Bottom line
While Telus has historically been a reliable dividend payer with a strong presence in the Canadian telecommunications market, several factors raise concerns about its future stability and performance. The unsustainable dividend payout ratio, high debt levels, and valuation concerns all suggest that investors should approach Telus stock with caution. Diversifying into more stable and financially sound alternatives within the sector may be a prudent strategy for mitigating risks and ensuring steady returns.
