Telus Corp.

FIDELITY TRUE NORTH FUND $31.32 (CWA Rating: Conservative) (Fidelity Investments Canada, 483 Bay St., Suite 200, Toronto, Ont. M5G 2N7. 1-800-263-4077; Web site: www.fidelity.ca. Load fund — available from brokers) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies. Fidelity True North Fund’s top holdings include high-quality stocks such as Manulife Financial, TD Bank, Suncor Energy, Rogers Communications, En- Cana, Bank of Montreal, Nexen, Telus Corporation and Royal Bank. The fund now invests 9.8% of its assets outside of Canada. The fund’s breakdown by economic segment is: 29.1% in Financials, 27.3% in Energy, 11.0% in Materials, 8.8% in Telecommunication services, 6.8% in Information technologies, 5.2% in Industrials, 4.7% in Consumer discretionary and 1.6% in Consumer staples....

TELUS CORP. (Toronto symbols T $63 and T.A $62; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 334.4 million; Market cap: $21.1 billion; SI Rating: Above average) has gained 15% since BCE confirmed it is talking with potential buyers. Telus could also decide to bid for BCE. However, a BCE-Telus merger would face significant political opposition. Meanwhile, Telus continues to enjoy the benefits of its heavy wireless investments. Thanks to a 17% jump in wireless profits, overall earnings in the three months ended March 31, 2007 rose 50%, to $0.90 a share from $0.60 a year earlier. The most recent earnings figure excludes a non-recurring charge of $0.32 a share. Revenue grew 4.8%, to $2.2 billion from $2.1 billion. The company aims to pay out between 45% and 55% of its sustainable earnings as dividends; the current annual rate of $1.50 yields 2.4%. The payout ratio in the past 12 months was 46%, so Telus will probably increase its dividend before the end of 2007....

MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service. Manitoba Tel’s revenue fell from $909.2 million in 2002 to $824.0 million in 2003. In June 2004, the company paid $1.6 billion for Allstream Inc., a national provider of telecom services to businesses. The purchase doubled the company’s size, and cut its reliance on Manitoba. This business now accounts for 55% of its total revenue. The Allstream acquisition pushed revenue up to $2.0 billion in 2005. Growing competition cut revenue in 2006 to $1.9 billion....

The likely takeover of BCE Inc. has pushed up prices of our two other telecom buys, Manitoba Telecom (see below) and Telus (see box on page 62). Any telecom takeover would face hurdles such as limits on foreign ownership and anti-competition concerns. But regardless of whether any takeovers occur, we feel all three of these stocks offer attractive long-term opportunities. Manitoba Tel is riskier than BCE and Telus, due to its heavy exposure to a single province and falling profits at Allstream, its Canada-wide business communications subsidiary. But the stock yields over 5%, and its profits are also improving thanks to a major restructuring plan. MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service....

TELUS CORP. (Toronto symbols T $62 and T.A $61; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 334.4 million; Market cap: $20.6 billion; SI Rating: Above average) has gained roughly 15% in the past few weeks, as a possible takeover bid for rival BCE Inc. has spurred speculation that Telus could also become a takeover target. It’s also possible the two firms will merge, but that would face strong opposition from telecom regulators and consumer groups. Meanwhile, strong demand for new wireless services such as downloadable video, games and ringtones helped offset slower subscriber growth. That helped increase the company’s total revenue in the first quarter of 2007 to $2.21 billion, up 6.3% from $2.08 billion a year earlier. Earnings jumped 50.0%, to $0.90 a share from $0.60. The most recent figure excludes a one-time charge related to its employee stock option program. Telus’s ongoing investments in its wireless network, as well as new rules that let customers keep their current mobile number, should help it attract more subscribers....

BCE INC. $35 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 807.6 million; Market cap: $28.3 billion; SI Rating: Above average) has moved up to its highest level in five years on takeover rumors. Media reports suggest that the Ontario Teachers’ Pension Plan, which owns 5.3% of BCE, may team up with a U.S. firm to offer $40 a share. Acquiring control of BCE could be difficult. Institutions control roughly 22% of BCE’s stock, and could block an offer they feel is too low. Federal regulations limit foreign ownership of Canadian telecom companies to 46%, which makes it harder to recruit non-Canadian investors. Other potential Canadian bidders like Telus would probably face competition concerns, particularly in the highgrowth wireless field....

Telus has been a top performer for us in the past few years. It got as low as $7.60 in 2002, mainly because investors feared it paid too much for its 2000 acquisition of wireless provider Clearnet. It then went on to a peak of $66 in September 2006. The final $12 of that rise happened after Telus announced that it planned to turn itself into an income trust. (Telus dropped its conversion plan after Ottawa decided to tax trust distributions.) But most of Telus’s gains since 2002 are due to the huge growth in its wireless business, which has helped offset slowing revenues at its traditional landline operations. Competition in the Canadian wireless industry will undoubtedly intensify in the next decade. But Telus’s ongoing investments in its wireless and traditional phone operations will give it a technological edge that will help fuel its long-term growth....

TELUS CORP. $54.34 (Toronto symbol T.A; SI Rating: Above average) is the main provider of telephone service in Alberta, British Columbia and parts of Quebec, with roughly 4.5 million customers. It also operates a national wireless service under the Telus Mobility banner. In the three months ended September 30, 2006, strong gains in Telus’ wireless operations pushed earnings up 73.6%, to $0.92 a share from $0.53 a year earlier. Revenue rose 7.3%, to $2.21 billion from $2.06 billion. Telus’s high exposure to wireless helps cut its reliance on its traditional phone business, which is facing growing competition from cable companies and Internet-based phone services....

BMO EQUITY FUND $31.63 (BMO Mutual Funds, 77 King Street West, Suite 4200, Royal Trust Tower, Toronto, Ont., M5K 1J5, 1-800-665-7700; Web site: www.bmo.com. No load — deal directly with the bank) (CWA Rating: Conservative) generally invests in the shares of 20 to 40 “blue-chip” Canadian companies. These stocks are selected based on the manager’s outlook for the industry they operate in, the earnings record of each company, the strength of management, and the potential for growth. BMO Equity Fund’s 10 largest holdings are Manulife Financial, Suncor Energy, Royal Bank, TD Bank, Sun Life Financial, EnCana Corporation, Barrick Gold, CIBC, Bank of Nova Scotia and Telus. The $2.2 billion fund currently holds 35.9% of its portfolio in the Financial services industry. Its next-largest holding is Energy at 20.0%....

Here are five large funds run by each of Canada’s big-five banks. Each holds the kind of conservative, well-balanced portfolios of high quality stocks we like. All five have a high weighting in Financial services and Energy stocks. However, they stick with high-quality issues with sound fundamentals, so these concentrations don’t add a lot of risk. Each has its quirks, but overall they are well positioned for low-risk returns. TD CANADIAN EQUITY FUND $30.40 (CWA Rating: Conservative) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.tdcanadatrust.ca. No load — deal directly with the bank) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies with strong growth potential. TD Canadian Equity Fund’s 10 largest holdings are Bank of Nova Scotia, Suncor Energy, Royal Bank, TD Bank, Rogers Communications, Canadian Oil Sands Trust, CN Railway, Tim Hortons, Canadian Natural Resources and Teck Cominco....