TELUS Corporation - Dividend Fact Sheet

| About: TELUS Corporation (TU)

TELUS Corporation (NYSE:TU) is a Canadian-based provider of telecommunication services, including landlines, wireless services, and Internet services. Telus trades on the Toronto Stock Exchange (TSX) under the ticker "T", and also trades on the New York Stock Exchange (NYSE), but under the ticker "TU". For the purpose of this article, we will refer to TELUS as T.

T is part of the S&P/TSX60 index. T is a Canadian corporation and therefore pays its quarterly dividends in Canadian dollar. In that sense, all the following figures are in Canadian dollars. Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

T pays a quarterly dividend. The dividends are generally declared in November, February, May, and August, and are generally paid in January, April, July, and October.

T generally increases its quarterly dividend at least once a year, in November and/or in May. In that sense, the last increase in November 2013 was of 5.9% (CA$0.34 per quarter to CA$0.36 per quarter).

Dividend History

T has increased its quarterly dividend for 9 consecutive years, making T a dividend challenger (between 5 and 9 years of consecutive dividend increases). The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

Between 2004 and 2008, T has aggressively increased its dividend as is apparent from the graph. Since 2009, T has been increasing its dividend at a lower but still respectable growth rate varying between 5% and 10%. Despite the slower growth, since 2009, the dividend growth rate has been on the rise. For a telco, such a dividend growth rate appears very reasonable.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

Then, the evolution of the free cash flow, dividends, and payout ratios.

Starting with the earnings, we can see that in recent years, T has been trying to maintain its dividend payout ratio around 60%. Again, for a telco operating in a near monopolistic market, such as payout ratio is very reasonable.

If the target payout ratio of T is indeed 60%, we can safely assume that future dividend increases will be in line with the growth in earnings such as to maintain the payout ratio at the current level.

With respect to the free cash flow, the payout ratio has been a bit more erratic. Still, more recently, the payout ratio has been hovering around 70%. A bit high but not enough, in my view, to put the dividend in danger.

As mentioned above, T operates in a near monopoly. The Canadian telecommunication market is indeed controlled by three main operators, T being one of them (the other two are Rogers Communications (NYSE:RCI) and Bell Canada (NYSE:BCE)). T's market is thus stable.

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

To begin with, T has shown its willingness to grow its dividend. So, I can presume T will continue to increase it. But can T actually increase its dividend?

I think the answer is yes. Overall, the earnings have been growing and the payout ratio is not too high such as to prevent T from further increasing its dividend.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For T, I've used the following inputs:

  • Share price: $37.50
  • Dividend rate: $1.44
  • Dividend growth rate:
    • Optimistic scenario: 16.0%
    • Realistic scenario: 12.8%
    • Pessimistic scenario: 9.6%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for T varies from $52.37 (pessimistic) to $104.69 (optimistic) with a realistic value of $73.55.

With a current share price around $37.50, T appears significantly undervalued.

I've also calculated that the DGR would need to be 6.29% over the next 20 years to justify the current price of $37.50.

Notably, a DGR of 6.29% is lower than the average dividend growth rate over the last 10 years and in also lower than the average earning growth rate over the last 10 years.

It thus seems that T would be more than able to maintain a DGR of at least 6.29% in the future.

Combined with a current yield around 3.8%, a DGR of at least 6.29% would make T an interesting investment.

At $37.50, I think T is undervalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculated how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow us to compare dividend stocks with different yields and different growth rates.

For T, I've used the following inputs:

  • Initial investment: $1000
  • Current yield: 3.84%
  • Dividend growth rate:
    • Optimistic scenario: 16.0%
    • Realistic scenario: 12.8%
    • Pessimistic scenario: 9.6%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

Interestingly, as we can see from the graph, even the pessimistic scenario beats the benchmark stock.

This was to be expected since T currently yields more than the benchmark stock (3.8% vs. 3%) and has been growing its dividend at a higher DGR than the DGR of the benchmark stock (9.6% vs. 8%).

I've calculated that the DGR of T would need to be around 6.3% in order for the ECR of T to equal the ECR of the benchmark stock.

This DGR is almost the same as the DGR calculated above to justify the current valuation.

If T can maintain a DGR of at least 6.3%, an investment in T would be comparable, with respect to the cash return, to an investment in the benchmark stock.

In my view, T can maintain a DGR of at least 6.3%.

At the current price and yield, I think T would make a good dividend investment.


Overall, I think T meets most criteria of a good dividend stock. The yield is very reasonable at around 3.8%, the recent DGR is also very reasonable (for a telco) at around 7.5%, and the payout ratio is not too high for such a company. In addition, not only does the stock appear to be undervalued, the stock will also likely return a fair amount of money over the years.

And, as the icing on the cake, T operates in a near monopolistic market. In my opinion, T would make a very sound dividend investment.

Final recommendation: I think T is a buy.

Full Disclosure

I don't currently own shares of T. I don't intend to initiate a position in T within the next 72 hours.