This Canadian stock has firm plans to keep raising its dividend 7% to 10% annually.
The company is making its wireless networks faster and more reliable as it strengthens its customer base. It continues to generate strong cash flow, with a 27% jump in the latest quarter. That in turn supports the rising dividend, which now yields 4.3% after the most recent increase.
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TELUS CORP. (Toronto symbol T; www.telus.com) has 9.0 million subscribers and is Canada’s third-largest wireless carrier after Rogers (No. 1) and Bell Mobility (No. 2). The wireless business supplies about 55% of its revenue, and 65% of its earnings.
The remaining 45% of revenue and 35% of earnings come from Telus’s wireline business. That operation has 1.3 million landline phone customers in B.C., Alberta and eastern Quebec as well as 1.8 million Internet users and 1.1 million TV customers.
Due to steadily rising demand for wireless and digital services, revenue rose 16.7%, from $11.4 billion in 2013 to $13.3 billion in 2017.
Overall earnings also improved 12.2%, from $1.39 billion in 2013 to $1.56 billion in 2015. Due to fewer shares outstanding, per-share earnings rose at the faster rate of 19.4%, from $2.16 to $2.58.
In 2016, Telus made a one-time payment of $350 million (in cash and common shares) to its employees. In exchange, it froze salaries until 2019. As a result of that payment, however, earnings dipped 1.7%, to $1.53 billion. Per-share earnings were unchanged at $2.58. Telus’s earnings then rose 2.1%, to $1.56 billion in 2017. Per-share earnings gained 1.9%, to $2.63, on more shares outstanding.
In addition to its main businesses, the company owns 65% of Telus International. Formed in 2005, this business operates call centres on behalf of corporate clients in North America, Central America, Europe and Asia. The firm also helps those clients manage their computer systems.
In February 2018, Telus International acquired 65% of Xavient Information Systems. It has an option to buy the remaining 35% by December 31, 2020.
Based in California, Xavient makes software that helps clients in the telecommunications, media, entertainment, health care, and banking and financial services manage their call centres and related operations. Telus’s share of the Xavient purchase price was $353 million.
Blue Chip Stocks: High-speed 5G wireless networks due to start operating in 2020
If you exclude unusual items, Telus’s earnings in the quarter ended June 30, 2018, rose 0.5%, to $414 million from $412 million a year earlier. Per-share earnings were flat in the quarter, at $0.70 a share, due largely to increases in financing costs and income taxes. Revenue rose 5.3%, to $3.45 billion from $3.28 billion.
The company signed 87,000 wireless subscribers to long-term contracts in the latest quarter, net of cancellations. Most of those customers use smartphones to access the Internet and stream videos. Even so, the company’s monthly average revenue per user slipped by 0.7% in the quarter, to $56.18 from $56.55. Overall, however, the company’s wireless subscriptions net of cancellations were up by 9.6%, to 91,000 from 83,000.
Telus continues to hang onto its existing users. Its overall churn rate, which shows how many wireless subscribers—both new and long-term—cancelled their service, was almost flat at 1.01% compared to 1.00% a year earlier. However, the specific rate for long-term users worsened to 0.83% from a record low of 0.79% a year earlier. That’s mainly due to new promotional offers by other wireless carriers.
Telus’s wireline business is also winning new customers, thanks to new investments in high-speed, fibre-optic lines. In the quarter, the number of high-speed Internet users rose 5.3%, while TV customers (excluding satellite users)improved 4.1%. Those gains are helping Telus offset declining demand for traditional landline phone services.
To attract new customers—and get them to spend more on its services—the company continues to make its networks faster and more reliable. It plans to spend $2.85 billion in both 2018 and 2019.
A big part of that spending will go toward developing new 5G wireless networks, which are up to 200 times faster than current 4G networks. As well, 5G systems will let Telus bring high-speed Internet service to smaller communities without having to build expensive fibre-optic networks. The company expects to launch 5G services in 2020.
Telus’s strong cash flow will continue to support those investments. Its free cash flow (regular cash flow less capital expenditures) in the latest quarter rose 26.5%, to $329 million from $260 million. For all of 2018, the company should generate free cash flow of $1.5 billion.
That will help Telus service its long-term debt of $13.1 billion (as of June 30, 2018), which is a somewhat high 45% of its market cap. However, the company has spread out the maturities of those loans so that it has to pay back just $1.0 billion each year. In the latest quarter, it also exercised an option for early redemption of part of its 2019 debt. In addition, more than half of Telus’s loans come due after 2022.
The company’s strong cash flow is also a steady source of dividends. Telus recently increased that quarterly payment by 4.0%. Starting in July 2018, investors will receive $0.525 a share, up from $0.505. The new annual rate of $2.10 yields a high 4.3%. The company has now raised its dividend 15 times since 2011.
Telus aims to pay out between 65% and 75% of its earnings before unusual items as dividends. In the 12 months ended June 30, 2018, dividends accounted for 77% of those earnings. That’s slightly above its target range, but the company remains committed to raising the annual rate between 7% and 10% for 2019.
The company will probably earn $2.84 a share for all of 2018. The stock trades at 17.1 times that estimate.
Recommendation in The Successful Investor: Telus is a buy.
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