TELUS CORP. (Toronto symbols T $57 and T.A $56; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 337.9 million; Market cap: $19.3 billion; SI Rating: Above average) is the second-largest provider of telecommunication services in Canada, after BCE Inc. It has over 4.5 million regular telephone customers and 1.1 million Internet subscribers in British Columbia, Alberta and parts of Quebec. These operations account for about 55% of Telus’s revenue and 50% of its earnings. The rest comes from Telus’s wireless business, which has 5.1 million customers nationwide. Telus’s revenue grew from $7.0 billion in 2002 to $8.7 billion in 2006, or 5.6% compounded annually. The company lost $0.72 a share (total $227.1 million) in 2002, due to restructuring costs following the Clearnet acquisition. But thanks to strong demand for wireless service, Telus’s profits grew from $0.93 a share ($329.8 million) in 2003 to $3.23 a share ($1.1 billion) in 2006. Cash flow per share more than doubled, from $3.88 in 2002 to $8.78 in 2006. The company’s focus on wireless should continue to pay off. Only 57% of Canadians use cellphones, so it still has plenty of room to grow.
Long-term focus pays off
Unlike some of its competitors, Telus has resisted giving away phones and other costly incentives to win new customers. It prefers to concentrate on more affluent users and long-term contracts, instead of building market share at the expense of earnings. This strategy seems to work. Telus’s profit margins in wireless typically exceed those at BCE and Rogers, its main competitors. (Other wireless providers such as Virgin Mobile lease network space from the three main wireless companies.) Telus also tends to hang onto its customers longer. New regulations that let users keep their current phone number when switching providers should make it easier for Telus to win more customers. Regulators are now looking at licensing a fourth wireless network in Canada. They may also allow foreign wireless firms to enter the Canadian market.
Ready for new competition
It will probably take two to three years before a fourth company enters the market. But Telus’s investments in its networks should keep customer satisfaction high. The company spent $4.71 a share on capital upgrades in 2006, up 27.6% from $3.69 in 2005. Capital spending will probably rise 10% in 2007, to around $5.20 a share. About 30% of that will go to the wireless operations. Telus plans to expand the number of cities where it offers high-speed wireless service, from 20 to 35. These investments should let Telus take advantage of growing demand for downloadable music and video content, which generate higher profits for it than regular phone calls. The remaining 70% of Telus’s capital spending will mainly go into its data, landline and TV businesses. These upgrades should help the company offer its business customers VoIP (Voice-over- Internet-Protocol) and other specialized data services, which can cut their communication costs. Telus recently won a five-year, $140 million communication- services contract with the Ontario government. Telus is also upgrading its high-speed consumer Internet services. This will help the company compete with cable companies, and speed up the launch of Telus’s new high-definition TV service. The company has wisely limited the initial rollout of the new TV service to a handful of neighbourhoods. This will give it time to fix the inevitable problems that come with new technology.
Balance sheet getting stronger
Besides improving its networks, Telus has used its strong cash flow in the past few years to pay down the debt it took on to buy Clearnet. Long-term debt is now $3.5 billion, or 0.5 times equity. That’s down 59.5% in the past five years, from $8.65 billion. The lower debt also cut Telus’s interest costs, and freed up cash for system upgrades. Telus now aims to enhance shareholder value. It spent $800.2 million on share buybacks in 2006, and plans to buy back 7% of its shares this year. It may also combine its voting and non-voting ‘A’ shares into a single class of common shares. This would improve its appeal to the many institutional investors that avoid dual-class stocks. The company should earn $3.40 a share in 2007, and the stock trades at 16.8 times that figure (16.5 times for the ‘A’ shares). That’s a little higher than other Canadian telephone stocks, but still acceptable in light of the strong profit potential of Telus’s wireless operations.
More dividends hikes on the way
Telus has increased its dividend three times in the past two years, and will probably raise it again in 2007. The current rate of $1.50 yields 2.6% (2.7% for the ‘A’ shares). Telus is a buy. The cheaper, higher yielding ‘A’ shares are the better choice.
