TELUS CORP. $39 (Toronto symbol T; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 615.5 million; Market cap: $24.0 billion; Price-to-sales ratio: 2.1; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www.telus.com) is Canada’s second-largest wireless carrier, after Rogers Communications, with 7.9 million subscribers. Wireless now supplies 54% of Telus’s revenue and 66% of its earnings.

The remaining 46% of revenue and 34% of earnings come from its wireline division, which mainly consists of 3.2 million traditional phone customers in B.C., Alberta and eastern Quebec. This business also includes 1.4 million Internet users and 865,000 TV customers.

Telus’s revenue rose 18.7%, from $9.6 billion in 2009 to $11.4 billion in 2013. Revenue will probably improve to $12.0 billion in 2014.

Earnings gained 31.5%, from $1.0 billion in 2009 to $1.32 billion in 2012. Per-share earnings rose 28.0%, from $1.57 to $2.01, on more shares outstanding (all per-share amounts adjusted for a 2-for-1 stock split in April 2013).

However, an accounting change caused Telus’s earnings to fall 1.8% in 2013, to $1.29 billion, while earnings per share were unchanged at $2.01. If you adjust for this change and exclude all unusual items, earnings per share rose 15.5%, from $1.87 in 2012 to $2.16 in 2013.

Telus continues to expand its wireless networks. It recently paid $1.1 billion for spectrum that should let it extend its service to other parts of Canada, particularly smaller cities and rural areas.

In addition, the company recently paid $229 million for Public Mobile, a wireless carrier with 280,000 subscribers in Ontario and Quebec. However, regulators rejected Telus’s $350-million offer to buy Mobilicity, another smaller carrier, with 165,000 wireless customers.

Network upgrades paying off

Excluding its latest acquisitions, Telus plans to spend around $2.2 billion on network upgrades in 2014, up 8% from $2.04 billion in 2013. It will devote about two-thirds of this cash to making its high-speed Internet service faster, mainly by replacing older copper-wire systems with fibre optic cables.

The remaining third will go toward increasing the speed and reliability of its wireless networks. That includes installing long-term evolution (LTE) technology, which is up to five times faster than current wireless networks.

The company’s cash flow will probably rise 9% in 2014, to $3.4 billion from $3.1 billion in 2013, so it can comfortably afford these outlays.

But even so, Telus is taking advantage of today’s low interest rates to borrow some of the cash it needs to pay for these investments. As a result, its long-term debt stood at $8.0 billion on June 30, 2014, up 6.6% from $7.5 billion at the end of 2013. That’s still a moderate 33% of the company’s market cap.

These upgrades are starting to pay off. In the second quarter of 2014, Telus added 58,000 new wireless subscribers, net of cancellations, down 26.6% from a gain of 79,000 a year earlier. However, that’s mainly because Ottawa now lets customers cancel their contracts after two years.

New plans keep customers loyal

Strong demand for wireless data increased Telus’s average revenue per subscriber by 2.3% in the second quarter. As well, the company’s new plans, which let users bundle multiple devices under a single account, are helping it hang on to customers with long-term contracts. In the latest quarter, it lost 0.90% of these subscribers, down from 1.03% a year earlier.

Telus also lost 15,000 regular phone customers, net of cancellations, in the second quarter. But that’s a big improvement over the 38,000 it lost a year ago. As well, demand for high-speed Internet remains strong: it added 15,000 net users, up 15.4%. Telus also added 23,000 net TV subscribers, though that was down 25.8% from a year ago.

Meanwhile, the company keeps expanding its health care division (less than 5% of revenue), mostly by purchasing smaller firms. This business has strong potential, as it helps doctors, pharmacies and hospitals convert patient records and other information to electronic formats. Insurance companies also use its services to process over 250 million drug plan claims a year.

Telus’s improving earnings and cash flow give it plenty of room to keep raising its dividend; the current annual rate of $1.52 a share yields 3.9%. It now plans to increase the payout by around 10% each year through 2016.

Buybacks, attractive p/e add appeal

Telus also spent $1.5 billion on share repurchases in the past two years. It now plans to buy back another $500 million worth by September 30, 2015. The company should earn $2.47 a share in 2014, and the stock trades at 15.8 times that estimate. It also trades at just 13.6 times Telus’s projected 2015 earnings of $2.87 a share.

Telus is a buy.