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Summary

  • Company’s robust growth in wireless and wireline segments and continued subscriber additions have grown profitability.
  • TU is consistently creating value for shareholders through dividend increases and aggressive share buybacks.
  • Safer credit outlook and strong growth potential make dividends safe.

I reiterate my "bullish" rating on Telus (NYSE:TU), the fastest growing telecom company in Canada. The company recently reported strong financial results for 1Q14 driven by outperformance in both wireless and wireline segments. Moreover, earnings growth was largely fueled by the company's strong revenue and EBITDA margin growth in both wireline and wireless segments. In addition, with the strong backing of a rock solid balance sheet and a growing cash flow base, the company is meeting shareholder expectations through consistent dividend increases and aggressive share buybacks.

Wireless Segment Stays Strong

For the past few quarters, TU's postpaid subscribers' net additions, the best compared to its peers, have been portending well for the wireless segment's success. Moreover, in the recent quarter, TU's long-term focus on improving churn rate resulted in a postpaid churn of 0.99%, a 12bps reduction year-on-year. Also, postpaid subscriber additions for the company has remained solid in recent quarters, which is helping the company deliver a healthy financial performance. The following chart shows the company's postpaid net additions over the quarters (net postpaid subscriber additions in the 000s).

Source: Company's Earnings Report

Moreover, with the continuous adoption of smartphones, the realization of the best access line retention, continuous enhancement of the 4G LTE network and high data usage, TU generated healthy wireless segment revenue growth of 5.6% year-on-year in 1Q14. Furthermore, the increased data services usage and industry-leading postpaid subscriber mix generated the 7th consecutive quarter of blended ARPU growth of 2% year-on-year in 1Q14 for the wireless segment. In addition, the growing postpaid subscriber metrics and strong revenue generation fueled a 190bps quarter-on-quarter EBITDA margin growth for the wireless segment.

I believe TU's strong growth potential in the wireless segment, with significant investments in infrastructure, 4G network services deployment and remodeling of spectrums, will keep on adding to the overall success. The following table shows the growth of revenue and blended ARPU, and the EBITDA margin trend for the wireless segment.

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

Revenue

(Y-O-Y Growth)

6%

5.5%

4%

3.3%

5.6%

Blended ARPU (Y-O-Y Growth)

2%

1.4%

1.7%

1.5%

2%

EBITDA Margin (%)

48.9%

48.5%

47.4%

42.1%

44%

Source: Company's Quarterly Earnings Report

Wireline segment's start to growth

With its continuous focus on service quality instead of aggressive advertisement spending, TU became the fastest growing wireline business in Canada. In the recent quarter, TU's subscriber base was strongly supported by the company's hiked up share in the market from its efficient Optik TV services. Moreover, the increased demand of higher margin high-speed internet was a strong pull-through in the company's subscriber base as the internet base grew 5.5% year-on-year with 21,000 net internet subscriber additions in the recent quarter.

Moreover, the combined optic TV and high-speed net additions continue to exceed the residential NAL losses. I believe with its continuous broadband investments in pushing the fiber deeper and improving the operational efficiency, the company will keep on growing the subscriber base more successfully in coming quarters. The following chart shows the combined TV and high-speed net additions, exceeding the NAL losses.

Source: Company's Quarterly Earnings Report

With this positive momentum in Optik TV and increased internet subscriber base, TU's wireline segment's revenue base grew by 4.4% year-on-year in 1Q14. Moreover, the robust revenue growth led to a healthy EBITDA margin of 28% in the quarter. I see an upside in the wireline segment's results for coming quarters, as the company has recently invested $155 million to expand its Optik TV services in its attempt to scale up wireline operations. The following table shows growth in revenue and EBITDA margin trend for the company's wireline segment.

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

Revenue

(Y-O-Y Growth)

2.9%

6.4%

3%

3.4%

4.4%

EBITDA Margin

28%

25%

26%

25%

28%

Source: Company's Quarterly Earnings Report

Secure Investor Front

Dividends offered by the company remain secure, with a strong backing from the cash flow base and a relatively secure balance sheet position among the key players in the sector. However, the recent quarter's FCF base was a bit stressed due to capital spending (MUTF:CAPEX) undertaken to support growth initiatives. I believe this FCF burden is short lived, as growth-generating investments will portend well for future earnings, which strongly supports its attractive dividend yield of 3.80%. Recently, TU increased its quarterly dividend by 11.8%. The following chart shows free cash flow and dividends comparison for TU.

Source: Company's Quarterly Earnings Report

Also, the company's relatively safer balance sheet as compared to its peers, with a debt to equity of 1.01x, which is fairly below Rogers Communications' (NYSE:RCI) 3.07x and BCE's (NYSE:BCE) 1.69x, provides greater visibility and security to the company's dividends. Moreover, the company does not have any significant debt maturities in the near term, as shown below.

Source: Company's Form 10-Q

Conclusion

The company recently reported solid financial performance for the first quarter of 2014. The company's robust growth in both wireless and wireline segments and continued subscriber additions have done quite well to grow its profitability. I believe the company is consistently creating value for its shareholders through dividend increases and aggressive share buybacks. Moreover, the safer credit outlook and strong growth potential indicate that dividends offered by the company are safe. Due to the aforementioned factors, I recommend a "buy" position in TU for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Investor-Centric Telus Holds Buy Recommendation