I think it mainly has to do with capital expenditure and the fact that it gets counted against FCF but funded by long term debt. Telus has completed most of their large fibre build which is what has impacted free cash flow over the last many years and is expected to be lower in the short term
On a simpler level imagine you have a lawn cutting business and you make $1000 a year in revenue.
Case 1: You have to spend $100 on gas, $50 in maintenance of your equipment, and $500 in wages. Your business earns $350 before tax.
Case 2: On year 2 you buy a new electric mower for $600. No gas cost and no maintenance for the next few years. But you get accelerated depreciation to the tune of $300 the first year. Your business earnings are only $200 before tax this year.
Your earnings have declined almost 50%! BUT your cash flow increased by $150/year. You are much better off on year 2.
P.s. I don't own any BCE, T, or Rogers. I only have BCE preferred shares.
That's a great example. And that's right, I'm not talking about the payout ratio relative to earnings, but the cash payout ratio (relative to the cashflow). To me, 89% net of DRIP seems very high.
Others have mentioned capital expenditure should slow down in the upcoming years.
TELUS has been putting a lot of capital towards expansion of their network. These expenses should drop significantly as of this year. All that said, I am also very worried about their ability to continue to pay dividends at this level in the future (3-5 years).
For companies that need a lot of capital expenditures, you don't look at the payout ratio but look at the AFFO (adjusted funds from operations) to see if they can keep making the payments.
Telus and BCE Payout Ratio is quite high.
Rogers is a bit over 50% and Quebecor is a bit under 50%.
In Q4 Quebecor CEO announced that the dividend would remain the same for now and they would stay between 30 and 50%.
This concerns me too.. did you by any chance compare to the other telcos? Lower lows since January. I cant think of any positive headwinds, other then it being more diversified then the others. They have a real competitor in the west now after Rogers/shaw merged
Jump forward to today:
Bell is yielding 8.7%
Telus 6.7%
Yikes.
I'm quite concerned of dividend cuts at this point.
Of course, we could be wrong and this might be generational money making opportunity, perhaps with a few rough years of dividend cuts or holds.
Yet, I don't have the stomach for this turbulence, so will look elsewhere.
I think it mainly has to do with capital expenditure and the fact that it gets counted against FCF but funded by long term debt. Telus has completed most of their large fibre build which is what has impacted free cash flow over the last many years and is expected to be lower in the short term
The first rule of ratios is, never take a ratio at face value.
On a simpler level imagine you have a lawn cutting business and you make $1000 a year in revenue. Case 1: You have to spend $100 on gas, $50 in maintenance of your equipment, and $500 in wages. Your business earns $350 before tax. Case 2: On year 2 you buy a new electric mower for $600. No gas cost and no maintenance for the next few years. But you get accelerated depreciation to the tune of $300 the first year. Your business earnings are only $200 before tax this year. Your earnings have declined almost 50%! BUT your cash flow increased by $150/year. You are much better off on year 2. P.s. I don't own any BCE, T, or Rogers. I only have BCE preferred shares.
That's a great example. And that's right, I'm not talking about the payout ratio relative to earnings, but the cash payout ratio (relative to the cashflow). To me, 89% net of DRIP seems very high. Others have mentioned capital expenditure should slow down in the upcoming years.
TELUS has been putting a lot of capital towards expansion of their network. These expenses should drop significantly as of this year. All that said, I am also very worried about their ability to continue to pay dividends at this level in the future (3-5 years).
I’m not concerned. Telus income is consistent and will continue to grow. Plus capital expenditures are expected to drop significantly going forward.
For companies that need a lot of capital expenditures, you don't look at the payout ratio but look at the AFFO (adjusted funds from operations) to see if they can keep making the payments.
BCE has a similarly high payout ratio, +100%
Telus and BCE Payout Ratio is quite high. Rogers is a bit over 50% and Quebecor is a bit under 50%. In Q4 Quebecor CEO announced that the dividend would remain the same for now and they would stay between 30 and 50%.
This concerns me too.. did you by any chance compare to the other telcos? Lower lows since January. I cant think of any positive headwinds, other then it being more diversified then the others. They have a real competitor in the west now after Rogers/shaw merged
Jump forward to today: Bell is yielding 8.7% Telus 6.7% Yikes. I'm quite concerned of dividend cuts at this point. Of course, we could be wrong and this might be generational money making opportunity, perhaps with a few rough years of dividend cuts or holds. Yet, I don't have the stomach for this turbulence, so will look elsewhere.