Telus Current Dividends Policy Assessment

Current Dividends Policy Assessment “Having a clear dividend growth model targeting two dividend increases per year to 2013 of circa 10% annually subject to the TELUS Board’s assessment and determination” (Telus)
Telus’s current dividend policy is to continue with its forward-looking dividend growth plan until at least the year of 2013. The plan is aimed to achieve two dividend increases per year with an annual growth rate of 10%. Of the two companies, Telus has a higher-than-industry dividend payout ratio. As compared to a industry level of 46.37%, in 2011, the dividend payout ratio of Telus was 59%, that is 13% percent higher than the industry level of 46% (Reuters, 2012), whereas, the payout ratio of Rogers in 2011 was 49%, slightly above
For a firm that has lower dividend payout ratio, it has extra cash to reinvest in more positive NPV project, which increases the value of the firm and the equity. This lead to higher capital gains that are otherwise taxable as a result of dividend payout. In this sense, Telus, as a higher dividend payer, may create a heavier tax burden to its shareholders than Rogers does. In addition, due to the fact that Rogers also applied shares repurchase approach to distribute profits to its shareholders, its shareholders can enjoy a lower tax on capital
The company has a average dividend of 8.8% over the past five year, and its dividend payout ratio and dividend yield are both higher than its peer Rogers and above the industry level. According to the residual dividend policy, the cash flow generated by the company should be first to satisfy necessary capital expenditures and debt repayment, and then the remaining should be the amount that is paid to the shareholder. Considering that Telus’s business strategy focuses on operational expansion, constant high dividend payouts may leave the company with less flexibility and hinder the growth of the business as the capital for reinvestment is leaked by awarding shareholders. However, since dividend policy is reflection of a company’s financial performance, immediately dividend cut announcement is apparently not a good choice as it may result in market overreaction in the share price. Therefore, Telus should be cautious in dealing with the implementation of the new dividend policy. It is recommended that Telus should first maintain its dividend growth rate at 10% by the end of 2013, which is consistent with its current management decision. And then the dividend growth rate should be slowly adjusted to the company’s growth rate of 4.37% over the time horizon of five