TELUS CORP. (Toronto symbols T $40 and T.A $39; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 335.6 million; Market cap $13.4 billion; SI Rating: Above average) provides local and long distance telephone service to 4.3 million customers in Alberta, British Columbia and Eastern Quebec. This business supplies about 29% of Telus’s revenue. The company also operates a national wireless communication network with 5.8 million subscribers. The wireless business accounts for 47% of its revenue. The remaining 24% of Telus’s revenue comes from providing Internet service to individuals and businesses. It has 1.1 million high-speed Internet subscribers. Thanks to a sharp rise in demand for wireless and Internet services, Telus’s revenue grew from $7.1 billion in 2003 to $9.1 billion in 2007. Earnings shot up from $0.97 a share (total $340.6 million) in 2003 to $3.79 a share ($1.3 billion) in 2007. If you exclude restructuring costs, Telus would have earned $4.11 a share ($1.4 billion) in 2007. Telus will soon face more competition in the wireless field. Ottawa plans to licence new providers, in addition to the current three companies (Telus, BCE and Rogers). Smaller providers such as Virgin Mobile lease space on existing networks.
Koodo attracts younger users
In response to the threat of new competition, Telus recently launched Koodo Mobile, a new low-cost wireless service aimed at younger customers. These plans exclude activation and cancellation fees, so they are less profitable than the long-term contracts that Telus generally prefers to focus on. But this new brand should help Telus expand its 27% market share. Telus also hopes that these younger customers will eventually upgrade to its more profitable regular wireless plans. Thanks to Koodo, Telus added a record 175,600 wireless subscribers in the three months ended June 30, 2008. That’s 37% more than the 128,200 it added in the year-earlier quarter. The success of Koodo also helped push up revenue in the quarter to $2.4 billion from $2.2 billion. Earnings rose 5.5%, to $267.0 million from $253.1 million. Telus is an aggressive buyer of its own shares. Consequently, per-share earnings rose 9.2%, to $0.83 from $0.76, due to 4% fewer shares outstanding.
Rising demand for data services
Telus earned 1.4% less per wireless subscriber in the latest quarter. However, the expanding customer base should help offset this decline. As well, demand for wireless email and downloads is growing quickly. That’s good news for Telus, since it earns higher profits on data services than traditional voice services. Recent upgrades that improved the speed and reliability of Telus’s wireless networks should spur more demand for data services. The company uses the CDMA (code division multiple access) wireless technology, which is common in North America. However, most of the world uses the GSM (global system for mobile communications) standard. Telus is now thinking about overlaying its system with equipment that will make it compatible with GSM phones. That would help Telus capture more roaming fees from foreign tourists and business travelers who use GSM phones while in Canada. It would also give Telus access to a wider selection of mobile phones, such as Apple’s GSM-based iPhone. Another area of growth is high-speed Internet access. In the second quarter, high-speed subscribers rose 70% from a year earlier. Just 25% of Telus’s phone customers use high-speed Internet services, so there’s plenty of room to expand. Telus also has high hopes for its new TV service, which uses high-speed Internet connections to deliver TV signals over ordinary phone lines. A TV service will help Telus compete with cable companies that now offer phone services. As well, it helps Telus hang on to customers by offering discounted bundles of services.
Emergis purchase looks promising
Telus is also expanding the services its offers to businesses. Earlier this year, it paid $743 million for Emergis Inc., which makes software that helps businesses automate and secure electronic transactions. Emergis’s software also lets hospitals and pharmacies efficiently store and process electronic patient records and other information. Emergis’s expertise should help Telus sell more communication services to businesses, particularly Emergis’s high-quality clientele in Central Canada. Telus will probably generate cash flow in 2008 of $2.2 billion ($6.50 a share), so it can comfortably afford Emergis. As well, long-term debt of $5.5 billion is a reasonable 40% of market cap. That gives it plenty of room to finance its planned capital expenditures of 2008 of $1.9 billion. This spending estimate excludes the roughly $900 million that Telus recently bid for new wireless frequencies. The company will probably earn $3.58 a share in 2008, and the stock trades at just 11.2 times that figure (10.9 times for the non-voting ‘A’ shares). The $1.80 dividend yields 4.5% (4.6% for the ‘A’ shares). Telus is a buy. The cheaper, higher-yielding ‘A’ shares are the better choice.
