RE:RE:RE:RE:Payout Ratio?THE TD COWEN INSIGHT
TELUS is emerging as the only large cap name in Canadian telecom with both a yield at least 350bp above 10-year bonds, and dividend growth. If/when the BoC keeps cutting rates, we believe T shares will be coveted.
Summary Of Our Thesis
1. TELUS is expected to sustain 7% dividend growth for the next three years, with a commitment to this from the company being likely at the AGM (and Q1/25 release) in May.
The combination of this growth, and a yield currently above 7% (a figure below shows the elevated spread versus historical levels versus 10-year bonds), should drive outsized investor interest in T shares relative to BCE (higher yield, but high risk of a dividend cut, or at a minimum no dividend growth), RCI.B (lower yield and no dividend growth), and QBR.B (lower yield and less scale and liquidity). The income characteristics at TELUS screen very well versus Canadian alternatives, and it also stacks up well versus the combination of dividend growth and yield that we see from global telco names in a figure below. Our target price is based on a blend of dividend yield and EV/EBITDA, but for perspective, we highlight that a move back to the long-term average dividend to bond yield spread of 273bp would put the stock at about $30 in one year (using a bond yield estimate of 3.0% and using a dividend 7% higher than today).
2. Dividend quality is reasonable:
The payout ratio on FCF (TD Cowen definition) remains above 100% in the near-term (111% estimated in 2025), but a combination of lower opex and lower capex (see next point on FTTH leadership) is expected to drive the payout below 100% in 2026 (97% estimated, albeit this would be right around 100% if one backs out the portion of TIXT FCF that is not owned), even with 7% dividend growth in both 2025 and 2026. We do not view the payout ratio as ideal, but we believe it is manageable and acceptable (and it is better than what we see at the main yield alternative in the space, BCE). Other than dividends paid in shares under the DRIP (which we hope goes away by 2026), we do not expect TELUS to have much FCF post dividends to lower debt, but non-core asset sales should help with debt reduction (more in point #4 below) and thus we believe the combination of leverage and payout ratio creates high quality dividend characteristics for investors.