An analysis of TELUS Corporation (TSE:T, TU) reveals a high dividend payout ratio relative to earnings, prompting investor scrutiny regarding the long-term sustainability of its dividend. Despite a history of consistent increases, recent financial performance and varying free cash flow payout estimates present a complex outlook for the telecommunications giant's attractive yield.

TELUS Corporation Dividend Sustainability Under Investor Scrutiny

TELUS Corporation (TSE:T, TU) is experiencing increased investor scrutiny regarding the sustainability of its dividend, as an analysis highlights a high payout ratio relative to reported earnings. Despite a multi-year history of dividend increases, recent financial disclosures and analyst projections present a nuanced picture for the telecommunications provider.

Dividends Under Review

As of recent trading, TELUS shares were approximately CA$22.70, offering a trailing dividend yield of approximately 7.3%. Data from September 2025 indicated a similar yield of 7.40% at a stock price of CA$22.12, which stands 35.7% below its all-time high of CA$34.42 reached in August 2022.

Historically, TELUS has been a consistent dividend grower, boasting 21 consecutive years of dividend increases, with an average annual increase of 7.27% over the past decade. Dividends declared per share in 2024 were $1.5566, marking a 7.0% increase over the previous year. The company has articulated a long-term guideline for its dividend payout ratio, targeting 60% to 75% of prospective free cash flow, and has committed to semi-annual dividend increases of 7% to 10% annually through to the end of 2025.

Financial Metrics Raise Sustainability Questions

The primary concern revolves around TELUS's dividend payout ratio. Last year, the company paid out a notably high 251% of its profit as dividends. This figure raises a red flag for many investors, as it indicates the company is distributing more in dividends than it generates in net income. Furthermore, earnings per share have declined at an approximate rate of 15% annually over the past five years, adding to the pressure on dividend coverage.

When examining the free cash flow (FCF) payout ratio, the picture becomes more complex due to differing reported figures. One analysis indicated TELUS paid out 71% of its free cash flow as dividends in a recent period, which is generally considered to be within a sustainable range for mature companies. However, other data from September 2025 reported a free cash flow payout ratio of 193.9%, alongside an adjusted earnings payout ratio of 162.4%.

For context, a free cash flow payout ratio between 50% and 75% is typically considered sustainable for established businesses. In capital-intensive sectors like telecommunications, payout ratios often range from 70% to 80% due to stable and predictable cash flows. A ratio consistently above 100% generally signals potential long-term unsustainability.

Operational Headwinds and Forward-Looking Projections

TELUS faced operational challenges in the second quarter of 2025, reporting a decrease in Adjusted EBITDA. This was attributed to a combination of factors, including reduced provisions from the prior year, increased salaries and benefits, rising goods and services costs outpacing revenue growth, lower mobile average revenue per user (ARPU), reduced mobile equipment margins, higher bad debt expense, and declining margins in fixed legacy voice and TV services. The TELUS Digital segment also saw a 26% decrease in Adjusted EBITDA. Customer additions also slowed, primarily due to decelerating Canadian population growth and increased competitive pressures.

Despite these headwinds, some analyst projections offer a more optimistic outlook for dividend safety in 2025 and 2026. For 2024, an estimated $2.1 billion in free cash flow against approximately $2.3 billion in total dividends paid suggests an FCF payout ratio around 110%. Looking ahead to 2025, analysts anticipate lower capital expenditures, projecting free cash flow to increase to approximately $2.8 billion ($1.87 per share). With estimated dividends around $2.5 billion (based on the low end of the 7-10% growth target), the FCF payout ratio could improve to approximately 90%, marking its lowest in years.

Further out, 2026 projections suggest free cash flow could reach $3.3 billion.

The Role of Dividend Reinvestment Plans (DRIPs)

An important factor mitigating immediate cash outflow for dividends is TELUS's Dividend Reinvestment Plan (DRIP). A significant portion of shareholders opt to receive dividends in the form of new shares rather than cash. While this mechanism dilutes existing shareholders over the long term, it reduces the immediate cash burden on the company, providing an additional layer of security for the cash dividend in the short term.

Analyst Perspectives and Valuation

While some analysts express caution regarding high-yield stocks with elevated payout ratios, others maintain that TELUS's dividend is secure for 2025 and 2026. This confidence is primarily based on the anticipated improvement in free cash flow generation and a projected decrease in capital expenditures. The company's valuation appears attractive, with a forward price-to-free cash flow ratio estimated to be under 11x for 2025 and approximately 9x for 2026.

The commitment of TELUS's CEO, who has taken his salary in shares, is also cited by some as a positive signal of management alignment with shareholder value. Additionally, the company's diversified divisions, including TELUS Health and TELUS Agriculture, are seen as providing long-term growth potential amidst current sector challenges. Potential positive catalysts, such as a business-friendly federal government and future real estate sales, could further bolster financial stability.

Outlook

Investors will be closely monitoring TELUS Corporation's financial performance in the coming quarters. Key areas to watch include the company's ability to realize projected free cash flow improvements through operational efficiencies and reduced capital expenditures. The sustained growth of its diversified business segments will also be critical in supporting long-term dividend sustainability. While a high payout ratio relative to reported earnings poses a notable challenge, the company's stated dividend growth targets, coupled with anticipated free cash flow recovery, indicate a pivotal period for TELUS as it navigates its commitment to shareholders.