TELUS CORP. $70 (Toronto symbol T; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 326.8 million; Market cap: $22.9 billion; Price-to-sales ratio: 2.1; Dividend yield: 3.7%; TSINetwork Rating: Above Average; www.telus.com) now gets 54% of its revenue and 62% of its earnings from its 7.7 million wireless subscribers across Canada.
The remaining 46% of Telus’s revenue and 38% of earnings come from its wireline division, which mainly consists of 3.4 million traditional phone customers in B.C., Alberta and eastern Quebec. This business also includes 1.4 million Internet users and 678,000 TV customers.
Telus’s revenue fell 0.5%, from $9.7 billion in 2008 to $9.6 billion in 2009, but rose to $10.9 billion in 2012. Earnings fell 11.5%, from $1.1 billion, or $3.52 a share, in 2008 to $998 million, or $3.14 a share, in 2009. However, earnings rebounded to $1.3 billion, or $4.03 a share, in 2012.
The company recently merged its common shares (one vote per share) and its non-voting shares into a single class. It will now split its common shares on a 2-for-1 basis on April 16, 2013. (Note: we have not adjusted per-share amounts for the split.)
Telus added 331,000 wireless subscribers (net of deactivations) in 2012, down 10.3% from 369,000 in 2011. That’s mainly because it lost a wireless contract with the federal government in 2011.
However, more of Telus’s wireless customers are upgrading to smartphones with long-term contracts. It’s also enjoying strong demand for wireless data from other mobile devices, like tablet computers.
As a result, average monthly revenue per user rose 2.2% in 2012, to $60.39 from $59.10. That also pushed up the wireless division’s overall revenue by 7.0%.
Higher smartphone subsidies worth it
Telus has to spend more to attract and retain smartphone users than cellphone customers. That’s mainly because it has to pay higher subsidies to smartphone manufacturers, such as Apple. However, smartphone users generate higher revenues over the lives of their contracts. Smartphones now account for 66% of Telus’s wireless users under long-term agreements, up from 53% in 2011.
Revenue at the wireline division rose 2.9% in 2012. Demand for local and long distance phone services continues to weaken. However, high-speed Internet demand remains strong. In 2012, Telus added 84,000 high-speed subscribers (net of deactivations), up 12.0% from 75,000 in 2011.
Another growth area is Telus’s new Optik TV service, which uses high-speed Internet technology to deliver TV signals to viewers in B.C., Alberta and eastern Quebec. Telus also offers satellite TV in B.C. and Alberta. The company ended 2012 with 678,000 television subscribers, up 33.2% from 509,000 in 2011.
The company continues to spend heavily on its networks: in 2012, it invested $2.0 billion in upgrades, up 7.3% from $1.8 billion in 2011. Of this total, 64% went toward its wireline division, which is replacing copper wires with fibre optic cables. That continues to help Telus attract more Optik TV and high-speed Internet users.
Telus spent the remaining 36% on upgrades to its wireless networks. It continues to expand its long-term evolution (LTE) network, which is up to five times faster than current wireless networks.
Capital spending to ease in 2013
After several years of rising investments, Telus expects its capital spending will drop slightly, to $1.95 billion, in 2013. The company’s cash flow will probably total $3.4 billion this year, so it can easily afford these costs.
That also leaves Telus plenty of room to keep increasing its dividend. The company has raised the payout four times since May 2011. The current annual rate of $2.56 a share yields 3.7%.
Telus is also using its strong cash flow to expand its health care division, which helps doctors, pharmacies and hospitals convert patient records and other information to electronic formats.
In the past five years, the company has invested over $1 billion in this business, mainly through acquisitions. For example, in March 2013, Telus paid an undisclosed sum for the Canadian Medical Association’s electronic medical record (EMR) business. This purchase made Telus Canada’s largest EMR service provider.
Health care is a promising niche
The health care business supplied just 5% of Telus’s revenue in 2012. However, its outlook is bright, as these services make the company’s clients more efficient and lower their costs. Telus should earn $4.25 a share in 2013, and the stock trades at 16.5 times that estimate. That’s a low p/e ratio in light of the company’s steady earnings growth and rising dividends.
Telus is a buy.
