TELUS CORP. (Toronto symbols T $52 and T.A $50; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 324 million; Market cap: $16.8 billion; Price-to-sales ratio: 1.7; Dividend yield: 4.2%; TSINetwork Rating: Above Average; www.telus.com) is Canada’s second-largest telephone company after BCE Inc. (Toronto symbol BCE).

Telus has been expanding its wireless operations over the past few years. As a result, it now gets 52% of its earnings from its 7.0 million wireless subscribers across Canada. Telus now has 28% of the wireless market. Market leader Rogers Communications Inc. (Toronto symbol RCI.B) has 36%.

The remaining 48% of the company’s earnings come from its traditional phone business, which has 3.7 million customers in British Columbia, Alberta and eastern Quebec. Telus also has 1.2 million Internet subscribers.

Telus’ revenue rose 11.2%, from $8.7 billion in 2006 to $9.7 billion in 2008, mainly on rising wireless demand. Revenue slipped 0.5%, to $9.6 billion, in 2009.

That’s because Telus was forced to lower its prices to compete with new entrants in Canada’s wireless market. However, revenue rebounded by 1.8%, to $9.8 billion, in 2010.

Earnings rose from $3.33 a share (or a total of $1.2 billion) in 2006 to $3.79 a share (or $1.3 billion) in 2007. However, restructuring costs cut Telus’ earnings to $3.14 a share (or $1.0 billion) in 2009. The company cut jobs in response to slowing growth at its traditional phone operations. The resulting savings helped its earnings recover to $3.23 a share (or $1.04 billion) in 2010.

In the three months ended March 31, 2011, Telus’ earnings rose 20.1%, to $328 million from $273 million a year earlier. Earnings per share rose 18.8%, to $1.01 from $0.85, on more shares outstanding. Revenue rose 6.5%, to $2.5 billion from $2.4 billion.

Mobile data demand on the rise

Telus continues to benefit from strong demand for smartphones, which let users access email and web sites. These devices, which the company typically sells under long-term contracts, now account for 38% of Telus’ wireless subscribers, up from 22% a year earlier.

In addition to smartphones, Telus is gaining from rising sales of touch-screen tablet computers, such as the Apple iPad. In the latest quarter, revenue from wireless data jumped 44%.

The company plans to spend $1.7 billion on capital upgrades in 2011, which is equal to what it spent in 2010. It will put most of these funds toward improving the speed and capacity of its wireless networks. Telus feels it can double its wireless download speed by the end of this year.

The company is also upgrading its high-speed Internet networks. That’s letting it launch new web-based services, like Optik TV, which delivers TV signals over phone lines to cities in B.C. and Alberta.

Telus added 44,000 new TV customers (net of cancellations) in the first three months of 2011, up 51.7% from 29,000 a year earlier. It now has 358,000 TV subscribers.

Telus’ new wireless, Internet and TV services continue to help it compete with cable companies.

Traditional phone users going wireless

Telus’ traditional-phone business had 5.1% fewer lines in service in the latest quarter than it did a year ago. But that’s partly because some customers are switching to wireless services, often from Telus.

As well, Telus offers its wireless, Internet and TV services in single, bargain-priced bundles. That makes it harder for its residential customers to switch providers. If they do, they lose the discount.

Telus can comfortably afford to keep investing in its networks. Its total debt of $6.2 billion is a manageable 37% of its market cap, so it has room to borrow more if necessary. As well, Telus has refinanced $2 billion of its debt in the past two years. This cut its interest costs.

Moreover, the company will probably generate cash flow of $2.8 billion in 2011. Even after it pays for its capital upgrades, it will still have $1.1 billion for other uses, including raising its dividend.

Telus recently increased its quarterly dividend by 4.8%, to $0.55 a share from $0.525. The new annual rate of $2.20 yields 4.2% (4.4% for the non-voting “A” shares).

Putting its core businesses first

Unlike rival BCE, which recently bought the CTV Television Network, Telus has no plans to buy a broadcaster. Instead, the company feels it can attract more customers by making its networks faster and more reliable. As well, regulators have forced BCE to make content from CTV available to Telus and other wireless carriers.

Telus has gained over 30% in the past year. Even so, the stock still trades at a reasonable 14.0 times (or 13.5 times for the class “A” shares) the $3.71 a share that Telus will probably earn in 2011.

Telus is a buy. The cheaper class “A” non-voting shares are the better choice.