A Glaring Caution Sign for This Perpetual Dividend Raiser

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Telecom giants are reliable when it comes to paying dividends. Investors in companies like AT&T (NYSE: T) and Verizon (NYSE: VZ) typically have nothing to worry about.

But sometimes the smaller ones can cause investors a bit of agita.

Canada-based Telus (NYSE: TU) pays a 4.2% yield on its ADRs traded in the U.S.

It has an impressive dividend growth history, boosting the payout every year for 15 years. And starting in 2011, the company said it planned to raise the dividend 7% to 10% per year, a vow it renewed in 2013 and in 2016.

Typically, we look at free cash flow to determine if a company can afford its dividend. Telus generated CA$141 million in free cash flow in 2016, but it paid out CA$1.1 billion in dividends. That’s not good.

In 2015, free cash flow was CA$1.1 billion, but it paid out CA$992 million.

Free cash flow was lower last year due to restructuring charges, lower profits and higher capital expenditures.

In 2017, cash flow is expected to grow. But it won’t be high enough to pay the dividend yet again.

It’s hard to imagine management would announce a dividend growth program if it wasn’t confident that it would be able to pay the larger dividend – especially with a 15-year track record of dividend hikes.

The decade and a half of history gives management the benefit of the doubt in my book. So I’m not too worried that the company is going to cut the dividend in the next year.

But keep an eye on the numbers. SafetyNet Pro is telling us that there is reason for concern. If cash flow doesn’t get back above the amount paid in dividends by next year, I would start to get worried.

What Is SafetyNet Pro?

SafetyNet Pro is a groundbreaking tool that predicts dividend cuts and raises with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc’s newsletter, The Oxford Income Letter. To learn more about SafetyNet Pro and The Oxford Income Letter, click here now.

Dividend Safety Rating: D

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Good investing,