TELUS (TSX:T) stock has long been considered a staple in Canadian portfolios, particularly for those seeking steady income through dividends. Yet with more risk among telecom companies, should retirees rethink their investment? Let's take a look at TELUS stock to see whether it's still a buy for retirees.

The numbers

Recently, TELUS stock reported its third-quarter 2024 earnings, which showcased strong operational performance. Net income surged by an impressive 88% year-over-year to $923 million, with earnings per share climbing 111%. This growth reflects TELUS stock's ability to manage its core businesses effectively and capitalize on its expanding customer base. For retirees, this kind of earnings momentum can be encouraging, as it suggests a level of stability and resilience that aligns well with the needs of income-focused investors.

One of Telus' most attractive features is its dividend yield, which currently stands at a substantial 7.3%. With a forward annual dividend of $1.61 per share, this is undeniably appealing for those relying on investment income during retirement. However, TELUS stock's payout ratio of 242.9% raises a cautionary flag.

A payout ratio above 100% means the company is paying out more in dividends than it earns in profits. While this doesn't immediately signal danger, it does mean TELUS stock relies on other sources, like cash flow or borrowing, to sustain its dividend payments. This can be risky if financial conditions change, such as a tightening credit environment or unexpected operational challenges.

Do the books balance?

TELUS stock does have significant debt, with total borrowings of $29.1 billion and a debt-to-equity ratio of 171.6%. While the telecommunications sector is often associated with high capital expenditures and debt levels, these figures are particularly high. Retirees need to consider how these obligations could impact the company's financial flexibility, especially during economic downturns. That said, TELUS stock's operating cash flow of $5.1 billion and levered free cash flow of $1.4 billion provide some reassurance.

Still, some investors may see this as an opportunity to buy at a discount. However, TELUS stock's valuation metrics indicate a mixed picture. Its trailing price/earnings (P/E) ratio of 35.1 is on the high side, thus suggesting that investors are paying a premium for its earnings. The forward P/E of 21.7 implies expectations of earnings growth. Yet it may also reflect a degree of market optimism that retirees should carefully weigh against the underlying risks.

What to watch

Despite these financial challenges, TELUS stock has demonstrated strong growth in its customer base. In the most recent quarter, the company added 347,000 new mobile and fixed customers, an 8.5% increase over the previous year. This growth highlights Telus' ability to attract and retain customers in a competitive market, which bodes well for its revenue stability.

Telecommunications is a necessity in today's connected world, and companies like TELUS stock benefit from predictable demand. Furthermore, TELUS stock has diversified its revenue streams beyond traditional telecom services, with ventures into digital healthcare and international operations. These initiatives could provide long-term growth opportunities, further enhancing the company's resilience.

The stock's beta of 0.72 indicates lower volatility compared to the broader market, making it a potentially less risky option for retirees who prioritize stability. While the overall market can be turbulent, TELUS stock's price movements are relatively subdued, which is advantageous for those who prefer steady investments.

Bottom line

TELUS stock is not without its risks, but it remains a compelling option for retirees seeking income and moderate growth. Its dividend yield and industry position make it appealing, but its high debt and payout ratio warrant a cautious approach. Retirees considering Telus should ensure it fits within a diversified portfolio and aligns with their risk tolerance and income needs. Consulting with a financial advisor can provide tailored guidance to help navigate these complexities.