B12 G THE GLOBE AND MAIL | SATURDAY, NOVEMBER 15, 2025 | REPORT ON BUSINESS I would like to get your opinion of Telus Corp.’s dividend. The shares yield more than 8 per cent, which makes me nervous. Do you think the dividend is sustainable? W hen a yield climbs into the high single digits, the market is telling you risk is elevated. While I don’t believe a cut is imminent, it’s clear that investors are increas- ingly concerned about the divi- dend’s long-term sustainability – or at least Telus’s ability to keep raising it. The company’s own behaviour is also telling. For more than a decade, Telus has raised its divi- dend twice a year, in May and No- vember. It extended that streak on Nov. 7 when it released third- quarter results and announced a dividend increase of “4 per cent over the same period last year.” However, on a sequential basis the increase was minuscule. The new quarterly dividend of 41.84 cents a share was just 0.5 per cent higher than the dividend of 41.63 cents declared the previous quar- ter, making it the smallest se- quential bump since Telus launched its semi-annual divi- dend growth program in 2011 – excluding 2020, when it skipped the usual May increase during the pandemic. To me, this sug- gests Telus may be moving to a more conservative dividend strategy. Still, even that tiny increase was too much for some analysts, who argue that Telus was already paying out more in dividends than is financially prudent, given its elevated debt levels and stated goal to deleverage its balance sheet. Liam Gallagher, an analyst with Veritas Investment Re- search, called the latest increase “ill-advised.” In a research note, he said his “main concern with Telus is that it does not generate enough cash to cover its gross dividend obligation.” According to Mr. Gallagher’s calculations, in the past year Telus generated about $1.6-bil- lion of free cash flow but paid out $2.5-billion in gross dividends, for a payout ratio of about 150 per cent. The gross dividends figure includes dividends paid in shares instead of cash under Telus’s dividend reinvestment plan (DRIP), which currently offers a 2-per-cent discount. Mr. Gallagh- er’s definition of free cash flow is also more conservative than Telus’s, because he includes “working capital related ac- counts that the company ex- cludes.” Telus’s own dividend payout calculation paints a more opti- mistic picture. In its third-quarter management’s discussion and analysis, the company says its payout ratio – excluding divi- dends paid as shares under its DRIP – is 75 per cent of operating cash flow (less capital expendi- tures), or 106 per cent if the DRIP dividends are included. Telus has been leaning heavily on the discounted DRIP, which covers roughly one-third of its common shares and saves about $800-million in cash annually, Mr. Gallagher said. However, the discounted DRIP dilutes existing shareholders and increases Te- lus’s dividend obligations as its share count rises. The company is aiming to gradually reduce the DRIP dis- count and eliminate it entirely by the end of 2027, but doing so could be challenging given that many shareholders currently en- rolled in the DRIP would presum- ably switch to cash dividends once the discount is gone, con- straining the company’s financial flexibility. “In our view, Telus is caught between a rock and a hard place, and we think a case can be made for cutting the dividend,” Mr. Gal- lagher said. In an interview, he said he doesn’t expect a dividend cut in the near term, because the company has several levers it can pull, including selling real estate, copper wire and other non-core assets and potentially monetiz- ing its Telus Health business. Still, based on concerns about Telus’s financial position, Mr. Gallagher downgraded the shares to “sell” from “reduce” and cut his intrinsic value esti- mate to $19 a share from $21. Mr. Gallagher is the only ana- lyst with a sell or equivalent rec- ommendation on the shares. According to LSEG data, there are 10 holds and seven buys, with an average 12-month price target of $33. Telus closed Friday at $20.38 on the Toronto Stock Exchange. Officially, Telus says it still aims to raise its dividend twice a year, but at a reduced rate of 3 per cent to 8 per cent annually from 2026 through 2028, down from its previous range of 7 per cent to 10 per cent from 2023 through 2025. It’s worth noting, however, that Telus’s dividend guidance includes the caveat that “divi- dend decisions will continue to be subject to our Board’s assess- ment and the determination of our financial situation and out- look on a quarterly basis. There can be no assurance that we will maintain a dividend growth pro- gram through 2028.” Moreover, in its 2024 annual information form, Telus said it takes into account several factors when determining its quarterly dividend rate, including “an on- going assessment of free cash flow generation and financial in- dicators including leverage, divi- dend yield and payout ratio.” In a statement provided to The Globe and Mail, Telus said the Veritas report “misrepresents our financial strength and dividend sustainability. The Veritas assess- ment also stands in stark con- trast to analysis from all five ma- jor Canadian banks (RBC, TD, Scotiabank, BMO, and CIBC) who all have a buy rating on Telus, with analysts consistently high- lighting Telus’s differentiated strategy, strong fundamentals, growth opportunities and divi- dend sustainability.” Telus added: “We recognize the importance of dividend growth for our shareholders. Our intention is to continue growing the dividend, subject to the board’s ongoing approval and assessment. We have no inten- tion of cutting the dividend and have recently announced our next three-year dividend growth covering 2026 through 2028.” My take: Telus shareholders already enjoy a handsome yield of about 8.2 per cent – substan- tially higher than those of its competitors. Rogers Communi- cations Inc., for instance, yields 3.7 per cent, and BCE Inc., which slashed its dividend by 56 per cent in May, yields 5.4 per cent. With Telus’s yield already ele- vated, continuing to increase the dividend doesn’t strike me as the best use of capital, especially for a company that wants to streng- then its balance sheet as it navi- gates through an increasingly competitive and uncertain envi- ronment. Finally, it’s worth pointing out that since BCE cut its dividend, the shares have posted a total return of 7.6 per cent. So, if Telus does eventually reduce its divi- dend, or even throttles back or pauses dividend increases, the stock won’t necessarily crater. The market could view it as a positive step for the company’s financial well-being. With an already rich yield and a balance sheet under pressure, Telus may be wise to focus less on dividend growth and more on debt reduction and investment. Investors should view a pause or slowdown in dividend hikes not as a red flag, but as a sign of dis- cipline. Disclosure: The author owns Telus shares personally and in his model Yield Hog Dividend Growth Portfolio. View the portfolio online at tgam.ca/dividend-portfolio E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails, but I choose certain questions to answer in my column. Examining Telus’s outsized dividend With its yield surging as the dividend rises and the stock sinks, some question the telecom’s capital allocation strategy JOHN HEINZL OPINION Officially, Telus says it still aims to raise its dividend twice a year, but at a reduced rate of 3 per cent to 8 per cent annually from 2026 through 2028, down from its previous range of 7 per cent to 10 per cent from 2023 through 2025. C anada’s small but fast-grow- ing reverse mortgage mar- ket is getting a shakeup. Bloom Finance, a Canadian fin- tech that specializes in reverse mortgages, announced this week it’s launching the first lifetime fixed-rate reverse mortgage in Canada. If you’ve never looked into reverse mortgages before, here’s the gist: They’re loans that let homeowners aged 55+ tap into up to about 55 per cent of their home’s current value. The money you get is tax-free, doesn’t affect government benefits like OAS or GIS, and you don’t have to make monthly payments. The loan and interest are paid back when you sell your home, move out or pass away. Reverse mortgages have long been criticized, in part because of the large amount of interest that accrues in the background, and at high rates. The market has ex- panded rapidly in recent years as more seniors look for ways to stay in their homes despite high living costs and rising interest rates. Most reverse mortgages offer either variable rates or fixed terms that last up to five years. That means when your term ends, your rate could change, and for retirees living on set incomes, that uncertainty can be nerve- racking. Bloom says it aims to take that anxiety off the table by locking in your interest rate for life. Right now, that lifetime rate sits at 6.69 per cent, higher than competitors such as Equitable Bank (6.54 per cent for a five-year fixed term) or HomeEquity Bank (6.64 per cent). “The reason we did this was to eliminate the uncertainty,” said Ben McCabe, founder and chief executive of Bloom. While the rate is fixed once you’ve locked in, the current 6.69-per-cent rate will likely fluctuate with 20-year bond yields for new customers, he said. Bloom will also waive prepay- ment penalties if you downsize, move into assisted living or pass away. You can even move to another qualifying home and keep your locked-in rate. That said, if you leave early for other reasons, the penalties are quite steep – starting at 8 per cent in the first year, then dropping a percentage point each year until year five, after which it falls to three months’ interest. “The reason is because we are locking in money for such a long term,” Mr. McCabe said. “It’s very expensive for us to break the loan.” The product isn’t for everyone. It’s meant for homeowners plan- ning to stay put long-term, not those who might want to pay off the loan or move within a few years, Mr. McCabe said. “We are re- ally looking for lifetime clients.” Jason Heath, managing direc- tor of Objective Financial Part- ners, said the appeal is obvious for retirees worried about rising rates. “It’s almost like buying an insurance policy against the risk of interest rates going up,” he said. But Mr. Heath said you don’t have to make payments on the reverse mortgage during the life of the mortgage. “So, if interest rates do go up, although it might be unpleasant because you’re paying more, your payments don’t increase the same way they could for a conventional borrow- er.” Overall, Mr. Heath said this innovation is a win for consum- ers. “I suspect there will be more and more competition here in Canada from different reverse mortgage providers and more products like this, which give con- sumers more options,” he said. A new reverse mortgage is promising indebted retirees the same rate for life MEERA RAMAN M oney manager Mike Vinokur isn’t one of those investors con- cerned about holding cash right now, even as stock markets trade near all-time highs, despite re- cent volatility. “We don’t suffer from FOMO [fear of missing out],” says the portfolio manager and senior wealth adviser with Propellus Wealth Partners at iA Private Wealth Inc. in Toronto, who over- sees about $200-million in assets. “We’re tactical in our approach and unafraid to hold cash as an asset class when warranted,” adds Mr. Vinokur, whose all-equi- ty growth portfolio is about 29 per cent in cash right now. He’s expecting a “healthy” cor- rection of up to 10 per cent to happen in the near term, which he views as an opportunity to deploy some of that cash. “We’re ready to pounce,” says Mr. Vinokur, adding he has a “buy list” of about 10 to 15 stocks for when the time comes. He hasn’t started buying, even after Thursday’s selloff. “We are more concerned about stepping in front of a freight train than missing out on upside at this juncture,” he says. “Our tech- nical indicators are still showing warning signs, so we prefer to sit on the sidelines for the time being.” The strategy is part of his approach to protect his clients from the full impact of a steep market drop while also preparing to buy quality securities when they appear to be on sale. Mr. Vinokur describes himself as a “fundamental value manag- er,” who also relies on some tech- nical analysis and seasonality to pinpoint entry and exit points for stocks. His average growth portfolio, which includes about 40 to 60 stocks, has returned 12.1 per cent year-to-date and 14 per cent over the past 12 months. Its annual- ized return since inception in June, 2023, is 16.2 per cent. The performance data is based on total returns, net of fees, as of Oct. 31. The Globe spoke with Mr. Vinokur recently about what he’s been buying and selling. Name three stocks you’ve been buying. Merck & Co. , the Rahway, N.J.-based multinational phar- maceutical company, is a stock we bought last month at US$86.97 a share. The health care industry, espe- cially in the U.S., has been out of favour for a while, in part owing to some Trump administration policies that have affected it. We think the sector will stabilize. Also, as baby boomers age, health care is a fairly recession-resistant industry. Merck is a well-diversified pharmaceutical company with a strong drug pipeline, a strong bal- ance sheet, and a healthy divi- dend yielding about 3.8 per cent. The stock is also trading at a rea- sonable valuation of about 10 times forward earnings. We’re cognizant of the risks associated with the pending pat- ent expiration for Keytruda, its blockbuster oncology drug, but the recent U.S. Food and Drug Administration approval of QLEX – a subcutaneous way to administer Keytruda – has re- duced those risks somewhat. Lincoln National Corp., the Radnor, Penn.-based insurance company, is a stock we bought twice in the past year – once in December, 2024, and once in January – at an average cost of US$32 a share. The company pro- vides life, health and disability in- surance as well as some retire- ment products. It has undergone a turnaround in recent years, including the appointment of a new chief exec- utive officer who has boosted capital and increased margins. Earlier this year, investment firm Bain Capital LP took a 9.9- per-cent equity stake in Lincoln at US$44 a share, a huge premi- um to the then-trading price. The new partnership with Bain Capital also increases the compa- ny’s ability to make non-dilutive investments. Lincoln maintains a healthy regulatory-based capital position of more than 420 per cent, trades at approximately 5.25 times for- ward earnings, and has a divi- dend yield of about 4.3 per cent. We believe this is a solid busi- ness capable of generating higher returns over time. Russel Metals Inc. is a stock we bought in August for $41.39 a share. It’s the type of company we don’t think investors have been paying enough attention to. It has carved out a niche: not pro- ducing metals, such as steel, but housing and distributing them. It has become one of the largest metals distribution and process- ing companies in North America. The company has proven to be an excellent acquirer, eking out synergies through integrations and economies of scale. Its latest deal to acquire seven service centre locations from Kloeckner Metals Corp. shows the market how its management team will take advantage of opportunities when the price and geography are right. We view the company’s strong balance sheet, low debt, high returns on capital, solid 4.4-per- cent dividend yield and regular share buybacks as an enticing combination. What’s more, given its expanding footprint in the U.S., the tariff situation doesn’t have a meaningful impact on its business. Name a stock you sold recently. Alcoa Corp., the giant Pitts- burgh-based aluminum compa- ny, is a stock we sold recently after owning it for less than a year. We bought it in December, 2024, for US$38.30 a share and sold it for US$39.48 in October. We really liked the company’s deleveraging strategy and, given the stock had fallen from its 2022 peak of US$98, our entry point made sense. However, as 2025 progressed, we realized that although de- mand for aluminum may be strong, the tariffs the Trump ad- ministration imposed may not be resolved soon and will continue to impede our earnings projec- tions and, therefore, valuation. (Although Alcoa is a U.S. compa- ny, a significant portion of its North American aluminum pro- duction is in Canada, which the Trump administration hit with 50 per cent tariffs.) We took the opportunity to walk away with a small profit. This interview has been edited and condensed. Why this money manager is buying Merck and selling Alcoa BRENDA BOUW THE MOVER ILLUSTRATION BY JOEL KIMMEL