Is TELUS Stock a Buy for its 7.35% Dividend Yield?

TELUS stock certainly looks attractive for its dividend yield, but is there anything else going for this telecom stock?

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published December 4, 2024 3:45 pm EST

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TELUS (TSX:T) offers an attractive 7.35% dividend yield, which immediately catches the eye of income-focused investors. And while that looks mighty fine, there are other points to consider before going all in. So, let’s look at what might make TELUS stock worth your time.

dividends grow over time — Source: Getty Images

The numbers

TELUS stock’s recent earnings report paints a positive picture, with net income for the third quarter of 2024 reaching $923 million. Earnings per share (EPS) saw an impressive 111% year-over-year growth, and free cash flow surged by 58%. These figures underscore the company’s ability to generate consistent returns and maintain robust operations, even in challenging market conditions.

Looking back, TELUS stock has demonstrated a reliable track record of growth. In the third quarter of 2023, it achieved a record-breaking addition of 406,000 telecom customers. This achievement highlights the company’s strong competitive position and its ability to attract and retain a growing customer base. Its strategic focus on expanding its services and improving customer satisfaction has clearly paid off over the years.

The future outlook for TELUS stock is equally promising. Analysts expect revenue to grow to $20.8 billion in 2025 and further to $21.8 billion by 2026. This anticipated growth is bolstered by the company’s strategic investments in technology and infrastructure. TELUS stock plans to invest $24 billion in Ontario and $17 billion in British Columbia over the next five years, focusing on enhancing its network and operations. Such commitments not only support its growth trajectory but also position the company to capitalize on future market opportunities.

Valuation

While the dividend yield is undeniably attractive, the sustainability of such payouts requires scrutiny. TELUS stock’s payout ratio is a hefty 242.92%, meaning it pays out significantly more in dividends than it earns in net income. Although the company has a history of dividend increases, this high payout ratio could be a cause for concern if earnings growth does not keep pace. For now, strong operating cash flow helps sustain these payouts, but it remains a factor to monitor closely.

Debt levels are another consideration. As of the most recent quarter, TELUS stock reported $29.05 billion in total debt, with a debt-to-equity ratio of 171.64%. While the company generates substantial cash flow, such high debt could limit financial flexibility. Investors need to weigh this against the company’s ability to service its obligations and continue funding growth initiatives.

In terms of valuation, TELUS stock’s trailing price-to-earnings (P/E) ratio stands at 34.76, with a forward P/E of 21.46. This suggests that the market anticipates earnings growth, which aligns with the company’s outlook. The price-to-book ratio of 2.07 indicates that the stock is trading at a premium relative to its book value, reflecting investor confidence in its future prospects.

Market strength

Compared to its industry peers, TELUS stock offers a higher dividend yield, making it particularly appealing to those seeking steady income. However, its elevated payout ratio relative to competitors may hint at greater risks if market conditions deteriorate. This is balanced by the company’s continued expansion and operational improvements, which enhance its overall appeal.

TELUS stock’s market position remains strong, with consistent additions in both mobile and fixed services. This reflects its ability to adapt and innovate in a competitive telecom landscape. Furthermore, the company’s focus on customer satisfaction and service quality helps it maintain a loyal customer base, which is crucial for sustaining long-term growth.

For income-focused investors, TELUS stock presents a compelling case. The dividend yield is generous, and the company’s growth plans and operational stability support its attractiveness. However, the high payout ratio and debt levels introduce some risks that cannot be overlooked. Ultimately, the decision to invest in TELUS stock depends on balancing the allure of its dividends with the potential challenges posed by its financial structure.