Telus (TSE:T) Dividend and Stock Analysis
If you’re a Canadian investor looking for some of the best Canadian dividend stocks, I’d almost guarantee you’ve had a look at telecommunications stocks or will in the near future.
Why? Well, they are some of the best income payers in the country for a multitude of reasons that we’re going to tackle in this article.
Now, is there one telecom company that stands out from the rest? Is Telus (TSE:T) your best option when it comes to dividend yield, dividend growth, and ultimately share price appreciation?
Let’s take a look.
Telus (TSE:T) dividend and stock analysis
Telus is one of the 3 major wireless companies here in Canada, and currently has a customer base that exceeds 9 million subscribers. This is approximately 30% of the overall market here in Canada, highlighting Telus’s large market share and economic moat.
The company provides internet, television, and landline phone services nationwide, but recently has made some strategic shifts and acquisitions into international business services, health data records, and security.
The company is one of the primary service providers in terms of internet and cable in Western Canada, and provides jobs to nearly 66,000 Canadians today. Canadian telecom companies are some of the most popular options for those who are just learning how to buy stocks, as they provide stable returns and lucrative dividends.
Lets take a look at Telus’s dividend
A lot of Canadian’s wrongfully avoid telecom stocks like Telus, BCE, and Rogers because they present high payout ratios. Unfortunately, they’re making a pretty big mistake and missing out on exposure to one of the strongest sectors in the country.
As of writing, Telus yields around 4.83%. Now, this isn’t the highest yield in the sector (BCE holds that title) but it is a strong dividend yield nonetheless.
To add to this high yield, the company also has a 5 year annual dividend growth rate of 8.18%, putting it ahead of both BCE and Rogers by a wide margin, and trailing only the pair of Cogeco companies for the fastest growing dividend in the sector.
Telus also holds the longest dividend growth streak out of the Big 3 telecom companies at 16 years. BCE is next in line at 11, while Rogers failed to raise its dividend last year, resetting its dividend growth streak to 0.
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As we can tell by the chart, Telus typically offers a yield in the mid 4% range, up until COVID-19 hit. This has boosted its yield due to a drop in share price.
When you see a consistent yield, especially in a company that has grown the dividend fairly consistently for the last 16 years, it’s often a good sign.
It means Telus’s share price is growing along with its dividend. As the dividend goes higher, if the stock price doesn’t go with it the stock will yield more. We can clearly see this is the case with BCE over the last 5 years.
In terms of payout ratio, Telus is currently paying out 126% of earnings. Now, this is where a lot of investors get scared and often look elsewhere out of fear of the dividend being cut. This is a huge mistake, and if you’re doing so, you’re likely missing out on this excellent high yielding sector.
When we look at payout ratios for telecom companies, we want to be looking at free and operating cash flows.
Why? Well, free cash flows is a measure of profitability that doesn’t include non-cash expenses from the income statement, which paints a much clearer picture on how much cash the company actually has to pay the dividend.
Telus is currently paying out around 91% of free cash flows, and 32% of operating cash flows. Now, this is still a high payout ratio, and is actually one of the higher ones in the telecom sector. It’s significantly higher than BCE’s 66% of free cash flows.
However, Telus has maintained its dividend with this rate of payout for some time now, so all things considered I’d say it’s unlikely we will see a cut or stalled growth.
As you probably know by now, Telus is part of the Big 3, which essentially form a 3 way monopoly here in Canada when it comes to telecom services. Shaw Communications has tried to steal market share from these companies and has done so with reasonable results thus far, but still has a long way to go.
This makes cash flow extremely reliable and predictable, and as such, I expect Telus to pay out an excellent dividend for the foreseeable future.
Telus stock valuation and outlook
Market Cap: $30.98 billion
Forward P/E: 20.76
Yield: 4.83%
Dividend Growth Streak: 16 years
Payout Ratio (Earnings): 90.66%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 7.26%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
It’s important we aren’t just buying a telecom stock for its dividend. We want appreciation in the form of share price, and we want the company to continue to expand and widen its economic moat.
In Telus’s case, they’re doing much better than both BCE and Rogers. Why?
Well, the company has decided to expand into the telehealth and security sectors. BCE and Rogers have both decided to run media divisions instead. Both telehealth and security drive much higher margins, and as a result Telus should be able to get the upper hand in terms of growth.
Secondly, the company is more of a pure-play telecom option and as such is probably one of the top options when it comes to 5G exposure here in Canada. Ditching Huawei was good for the company, and it can now work with Samsung and Ericsson to become the top 5G provider in Canada.
In terms of growth, both analysts and myself believe Telus to be the best option moving forward. In fact, they expect the company to drive earnings growth of 15% and revenue growth of 7% next year. This is the highest expected growth rates out of the 3 major telecom companies.
As a result of both its excellent dividend and growth prospects, Telus does command a higher price. The company is currently trading at 20.39 times earnings.
When looking at the company’s price to earnings, this is the most expensive Telus has been over the last half decade. It’s trading at relatively the same valuation as BCE and at a significant premium to Rogers, more than likely due to the decision by Rogers to stall dividend growth.
Overall, Telus should be able to drive top and bottom line growth throughout the remainder of 2020 and into 2021
This is especially true with the interest rates we’re seeing today. Remember, telecom companies like Telus, Fortis (TSE:FTS), or even Enbridge (TSE:ENB) operate in a capital intensive business.
This requires them to take on a lot of debt to expand infrastructure. A drop in interest rates for a company like Telus which carries over $20.15 billion in debt can result in a significant increase in its earnings.
If you’re looking for the best telecom play in Canada today and one of the best stocks for consistent dividend income, I think it would be a mistake to overlook Telus right now. We can see by its chart that it’s outperformed the TSX Index over the last 5 years, and is the best performing Big 3 telecom stock over the same period by over 1000 basis points.