This Canadian Dividend Stock Is Down 18% and a Screaming Buy

Telus (TSX:T) stock fell 18% in the last six months to below $18 as management’s dividend updates hinted at stressed financials. It initially announced 3-8% dividend growth between 2026 and 2028, but later paused dividend growth until the stock reflected the business’s value.

Why is this Canadian dividend stock down 18%?

Canadian telecom stocks have struggled since 2022 due to interest rate hikes and regulatory changes. Telecoms have significant debt on their balance sheets, and the 5G infrastructure spending and spectrum buying have increased the debt further.

Significant debt on the balance sheet

As of December 31, 2025, Telus had long-term debt of $27.4 billion, which is 1.3 times its annual revenue. It has more debt than revenue, which raised an alarm. If the debt increased, and earnings before interest, taxes, depreciation, and amortization (EBITDA) were unchanged, how did the net debt to EBITDA reduce to 3.4 from 3.9 times a year before? The telecom increased its cash reserve to $2.6 billion from $869 million in 2024 to control liquidity risk.

Even at 3.4, the leverage ratio is way above its target range of 2.2-2.7. If Telus has to achieve this ratio, it has to reduce its debt by $5 billion, assuming EBITDA remains unchanged.

High dividend-payout ratio

BCE slashed its dividend because its payout ratio had been above 100% for four consecutive years, and it was burning cash on restructuring and interest payments on its debt. In Telus’s case, its payout ratio is 75%. However, 75% ratio is after deducting the $876 million dividend amount used for buying treasury shares under the dividend-reinvestment plan (DRIP). If we add the DRIP amount, the payout ratio is 110% of free cash flow (FCF), way above its target range of 60-75%.

Deteriorating fundamentals affected the share price, and the stock sank to its multi-year low.

Telus’s dividend-turnaround plan

Telus management has developed a turnaround plan to reduce debt and increase FCF. A three-year roadmap with practical financial targets gives investors hope. While these efforts may still not bring the financial ratios within the target range, they will help reduce liquidity risk.

Here are the financial targets for 2026-2028:

Leverage ratio: Telus aims to reduce its leverage ratio to 3.3 times by the end of 2026 by growing revenue and adjusted EBITDA by 2-4%. However, it will have to reduce debt by approximately $1.5 billion to achieve a three times ratio in 2027, assuming adjusted EBITDA grows by 3% in 2027.

Particulars20252026*2027*Long Term Debt$27,437.0$27,437.0$27,437.0Adjusted EBITDA$7,354.0$7,574.6$7,801.86Cash$2,621.0$2,621.0$2,621.0Net Debt$24,816.0$24,816.0$23,405.6Net Debt/EBITDA3.43.33.0

To grow EBITDA, Telus is focusing on cross-selling its enterprise artificial intelligence (AI) solutions, which are now a part of its business after the privatization of TELUS Digital. The company also expects to realize annual cash synergies of $150 million in 2026 from this privatization.

FCF: Telus aims to grow its FCF at a compounded annual rate of 10% between 2026 and 2028. Considering that Telus has paused its dividend growth and will step down its DRIP discount, 10% growth should help it achieve a payout ratio of 100% after including the DRIP amount.

Particulars20252026*2027*Free Cash Flow$2,208.0$2,428.8$2,671.7Dividends$2,532.0$2,608.0$2,686.2Dividend Payout Ratio115%107%101%

To grow FCF by 10%, Telus is reducing its capital expenditures by 10% to $2.3 billion in 2026.

Dividend yield opportunity

If Telus manages to monetize on its real estate and copper assets, it can channel that money into debt reduction. If the business goes as usual, Telus can at least stabilize its fundamentals at the end of 2027. Then it can focus on improving the fundamentals and bringing the ratios within the target range. Once that happens, the telco could resume dividend growth.

Now is the time to buy the stock and lock in 9.3% dividend yield. If Telus achieves the above targets, the management won’t be forced to slash dividends, and the share price will also recover. After four to five years, dividend growth may resume.

Investor takeaway

Telus remains a risky but rewarding dividend stock. While debt and payout ratios are stretched, management’s turnaround plan provides a path to stability. Investors willing to hold through volatility can benefit from a 9.3% yield today and potential dividend growth in the future.

The post This Canadian Dividend Stock Is Down 18% and a Screaming Buy appeared first on The Motley Fool Canada.

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More reading

• The Canadian Blue-Chip Stock Trading at Bargain Prices Right Now
• The $109,000 TFSA Milestone: How Do You Stack Up?
• 1 Dividend Great I’d Buy Over Telus or BCE Stock Today
• Where I See Telus Stock 3 Years From Now
• 2 Brilliant Growth Stocks to Buy Now and Hold for the Long Term

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.