TELUS CORP.(Toronto symbols T $63 and T.A $62; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 325.8 million; Market cap: $20.4 billion; Priceto- sales ratio: 1.9; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www.telus.com) continues to expand its wireless business. Its 7.4 million subscribers across Canada now supply 53% of its revenue and 63% of earnings.
The remaining 47% of Telus’s revenue and 37% of its earnings come from its wireline division, which mainly consists of 3.5 million traditional phone customers in B.C., Alberta and eastern Quebec. This business also includes 1.3 million Internet users and 595,000 TV customers.
Telus’s revenue rose 6.4%, from $9.1 billion in 2007 to $9.7 billion in 2008, mainly on rising wireless demand. Revenue slipped 0.5%, to $9.6 billion, in 2009 because Telus cut its prices to compete with new entrants in the wireless market. However, revenue rebounded to $9.8 billion in 2010, and to $10.4 billion in 2011.
Earnings fell from $3.79 a share (or a total of $1.3 billion) in 2007 to $3.14 a share (or $998 million) in 2009. That was mostly due to severance and other unusual costs related to a restructuring of Telus’s traditional phone business. The resulting savings helped push up its earnings to $3.27 a share (or $1.05 billion) in 2010, and to $3.74 a share (or $1.2 billion) in 2011.
Telus recently lost a wireless contract with the federal government. That’s why it added just 86,000 users (net of deactivations) in the three months ended June 30, 2012, down 8.5% from 94,000 a year earlier.
Long-term contracts add stability
Telus sells most of its smartphones under long-term contracts, so it’s harder for users to switch to a competitor. Customers under long-term contracts now account for 84.7% of its total wireless customers, up from 82.4% a year earlier.
The company is also benefiting from the ongoing popularity of smartphones, tablet computers and e-book readers, which are more profitable than regular cellphones. Average revenue per user for wireless data services rose 21% in the latest quarter, while revenue for voice services fell 6.7%. Smartphone users now account for 59% of the company’s wireless subscribers under long-term contracts, up from 42% a year ago.
The rise in smartphone users helped push up Telus’s revenue by 4.3% in the second quarter of 2012, to $2.7 billion from $2.6 billion a year earlier. Earnings rose 1.2%, to $328 million from $324 million. Because of fewer shares outstanding, earnings per share rose 2.0%, to $1.00 from $0.98.
Ultra-fast service should be a big seller
Telus recently launched its new Long-Term Evolution (LTE) network in 14 Canadian cities. LTE is up to five times faster than current wireless networks. These upgrades will let Telus take advantage of strong consumer interest in new LTE-capable smartphones, such as the Apple iPhone 5 and the Samsung Galaxy S III.
At the same time, the company is replacing its copper wires with fibre optic cables. That will make its Internet service much faster. It will also help it build on the success of its new Optik TV service, which delivers high-definition TV signals over fibre optic cables. The company added 43,000 TV subscribers in the latest quarter, to bring the total to 595,000, up 47.6% from a year earlier.
Telus will probably spend around $1.95 billion to upgrade its networks and other operations in 2012. That’s up 8.3% from $1.8 billion in 2011.
The company’s cash flow will probably total $3.2 billion in 2012, so it can easily afford these investments. That also leaves it with plenty of room to keep raising its dividend; Telus recently increased its quarterly payout by 5.2%, to $0.61 a share from $0.58. The new annual rate of $2.44 yields 3.9% (3.9% for the non-voting class A shares).
The company will probably earn $4.00 a share in 2012. The stock trades at 15.8 times that estimate (15.5 times for the non-voting shares).
Bad deal for voting shareholders
Telus recently revived its plan to merge its 174.9 million common shares (one vote per share) and its 150.9 million non-voting shares into a single class. Under the terms of the proposal, each non-voting share will become one common share.
The plan will let the common shares trade on the New York Stock Exchange; right now only the non-voting shares trade on New York. That should improve the liquidity of the common shares.
Passing this proposal will be a plus for the non-voting shareholders. However, the common shareholders will receive nothing for the dilution of their voting power. Still, it’s likely that the common shareholders will vote for the plan.
Even though they receive identical dividends and have similar liquidity, the non-voting shares were typically cheaper than the common shares. That’s why we’ve long recommended the non-voting shares over the common stock.
Telus is a buy. The cheaper, non-voting class A shares are still the better choice.
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