I've been thinking about adding Telus to my RRIF for its dividend of over 7% and slow but hopefully steady growth over time. However, a service I subscribe to puts its Earnings Payout Ratio at 251% and its FCF Payout Ratio at 116%. And also says its debt-to-equity ratio is not healthy. Are these numbers accurate, and could I have your thoughts on buying T at today's price and holding 5 years? And could you also compare it to POW for the same 5 year hold.
Thanks 5I,
Peter
Dividends are paid with cash, of course, not earnings, so we do prefer looking at cash flow payout ratios. The telco sector does have a lot of debt. This is common due to high capital spending for networks but also OK due to the stability of cash flow. 12-month payout ratio using just operating cash flow is just 32%. On 12-month trailing earnings payout ratio is 125% and FCF payout 68%. Now, some capital expenditure is of course needed, but T is in OK shape for dividends. We see it as the best choice in the Canadian sector. The dividend was raised in May. We would be comfortable buying it for income primarily. POW is doing better and is cheaper on valuation. The yield is lower and operating cash flow payout is 48%. They are very different of course, but POW may be safer as it has less need for capital spending overall, being in a capital-light business. POW has improved, but we would not expect the same degree of returns going forward (it is up 45% in a year).