High dividends are certainly sought after and appreciated by investors, particularly in the current inflationary environment.
Some companies pay all or almost all of their profits to their shareholders, while others pay only part of it and inject the rest into their activities.
In telecommunications, necessary network investment programs may “temporarily” affect the dividend payout ratio. Lower capital expenditures lead to higher free cash flow.
The dividend payout ratio is generally calculated on the basis of profits generated or cash flows (which, unlike profits, are not affected by non-monetary elements such as amortization).
In the case of Telus, Marc L’Écuyer points out that since the beginning of 2023, the company has increased its level of debt. “Going forward, it can also issue shares or reduce its capital expenditures,” he says.
If the workforce reduction measures announced on Friday result in a temporary dilution of free cash flow this year, Telus argues that these cuts will support the expansion of free cash flow in the years to come, in addition to supporting the progress of the program. multi-year dividend growth.
Telus and BCE have had well-established dividend growth programs for several years.
Some investors buy shares of companies like BCE and Telus for the dividend. For them, telecommunications companies are a safe haven. Nevertheless, Telus’ stock has fallen from around $30 three months ago to $23 today. BCE shares have fallen from $65 in May to $55 today.
Telus’ 7% boost to its quarterly spring dividend was the 24th increase since its program launched in May 2011.
Telus says continued investment in its broadband network is bolstering its confidence in the long-term viability of its dividend growth program. When announcing its most recent dividend increase, Telus pointed out that the “significant reduction” in annual capital expenditures starting this year should lead to a significant and sustainable expansion of its free cash flow.
BCE is also trying to maintain consistent and sustainable growth in its dividend. BCE’s 7% dividend yield — the highest in the nation’s telecommunications sector — certainly makes the stock very attractive.
Management argues that this is a reflection of BCE’s stable financial position and that the objective is to ensure dividend growth by maintaining a payout ratio within the range of 65-75% of cash flows. available cash.
However, BCE expects the payout percentage based on its cash flow to remain above its target of 65-75% for the duration of its current network investment program.
For fiscal 2023, National Bank Financial analyst Adam Shine expects BCE adjusted earnings per share to be $3.14 and cash flow to be $3.48 per share.
With an annual dividend of $3.87 per share, the payout ratio exceeds 100%. Adam Shine, however, expects BCE’s cash flow per share to increase to $4.04 in 2024. But we’ll have to see how BCE’s level of profitability and its ability to generate cash flow evolve, and hold also account for another 5% dividend increase to follow in 2024.
Some will say that in the context of transformation of the sector and the evolution of the regulatory, competitive and macroeconomic environment, reducing the dividend would be the responsible gesture to make to increase the room for maneuver. But don’t count on it too much. This is a last resort solution for a leader.