Telus Corp. boosted its earnings in the latest quarter on stronger sales and increasing revenue per subscriber.

After several years of explosive growth, Canada’s wireless industry has started to slow. That’s mainly because 85% of all Canadians now own a cellphone.

Even so, the outlook for wireless carriers such as Telus remains bright for several reasons. One key factor is Canada’s expanding population. As well, new high-margin services such as wireless video streaming (like Apple’s FaceTime) should spur earnings.

Telus’s exposure to Western Canada adds risk, as resource firms cut jobs in response to low oil and commodity prices. However, ongoing investments in its networks will help it hang on to its customers and attract new ones.

TELUS CORP. (Toronto symbol T; www.telus.com) is Canada’s second-largest wireless carrier, after Rogers Communications, with 8.4 million subscribers. Wireless now supplies 55% of Telus’s revenue and 67% of its earnings.

The remaining 45% of revenue and 33% of earnings come from its wireline division. It consists of 1.4 million landline phone customers in B.C., Alberta and eastern Quebec. This business also includes 1.6 million Internet users and 1.0 million TV customers.

Telus’s revenue rose 20.2%, from $10.4 billion in 2011 to $12.5 billion in 2015. Earnings gained 8.5%, from $1.22 billion in 2011 to $1.32 billion in 2012. Due to more shares outstanding, earnings per share gained 7.5%, from $1.87 to $2.01.

The company’s earnings then improved to $2.01 a share (or a total of $1.29 billion) in 2012, and to $2.31 a share (or $1.43 billion) in 2014. However, earnings dipped to $2.29 a share (or $1.38 billion) in 2015.

Blue Chip Stocks: Earnings up 2.2%

If you exclude unusual items—mainly the cost of boosting efficiency as well as fees related to paying off debt—earnings per share were $2.58 in 2015. That’s up 7.1% from $2.41 in 2014.

In the quarter ended June 30, 2016, Telus earned $415 million, up 2.2% from $406 million a year earlier. Earnings per share gained 6.1%, to $0.70 from $0.66, on fewer shares outstanding. Revenue rose 1.5%, to $3.15 billion from $3.10 billion.

Telus added 40,000 new wireless subscribers in the quarter, net of cancellations, down 36.5% from a gain of 63,000 a year earlier. That’s partly due to the weaker economy in Alberta.

However, the company continues to retain its current subscribers with strong customer support. Its churn rate, which measures how many subscribers cancelled their service, improved to 1.15% for the quarter from 1.17% a year earlier.

Meanwhile, strong demand for wireless data increased Telus’s average monthly revenue per subscriber by 1.4%, from $63.48 to $64.38.

The company also continues to benefit as more of its wireless users upgrade to smartphones and long-term contracts. These subscribers now account for 87.5% of its wireless customers, up from 86.5% a year earlier. That’s partly because Telus’s landline phone users are switching to wireless service. It lost 21,000 regular phone customers in the latest quarter, net of cancellations, compared to the 13,000 it lost a year ago.

The company also continues to attract customers to its fibre-optic and satellite TV services. It ended the quarter with just over 1.0 million TV customers, up 7.9% from a year ago. Another area of growth is its high-speed Internet business, which has increased its subscribers by 6.4% in the past year.

Those gains reflect Telus’s heavy investments in its networks over the past few years. It spent $2.6 billion on making its systems faster and more reliable in 2015, and expects to spend a further $2.85 billion in 2016.

To help pay for these upgrades, the company recently sold 35% of its Telus International subsidiary to an Asian private equity firm.

Formed in 2005, this business operates call centres on behalf of corporate clients in North America, Central America, Europe and Asia. It also helps those clients manage their computer systems. Telus received $600 million for this stake.

With this sale, the company held cash of $428 million on June 30, 2016. Its long-term debt of $10.8 billion was then 42% of its market cap.

However, Telus’s annual free cash flow (or cash flow minus capital expenditures) in the past 12 months totaled $741 million. That gives it plenty of flexibility to pay down its debt. In addition, the due dates on the company’s loans are staggered up to 2046. So its annual repayments remain manageable.

Telus is also using its steady cash flow for dividends. In July 2016, it raised those quarterly payments by 4.5%, to $0.46 a share from $0.44. The new annual rate of $1.84 yields 4.2%.

The company now plans to increase its dividend twice a year for 2017, 2018 and 2019. It expects the average annual increase to be between 7% and 10%. In addition, Telus plans to repurchase $250 million of its shares each year for the next three years.

The company’s cost-cutting plan should improve its earnings per share by 3.4%, from $2.66 in 2016 to $2.75 in 2017. The stock has gained 15% since the start of this year, but still trades at a moderate 16.0 times next year’s forecast.
Recommendation in The Successful Investor: BUY

For our advice on making the right choices among dividend stocks, read Advice for building a great dividend stock portfolio.

For our recent report on the Canadian blue chip that is Telus’ largest competitor, read Acquisition positions BCE for growth.