Healthy Performance Set To Continue As Telus Continues To Share Success With Shareholders

Aug.18.14 | About: TELUS Corporation (TU)

Summary

Strategic initiatives to improve services and compete successfully helping strengthen wireless and wireline operations.

Sharing success with shareholders through dividends and share repurchases.

Investments to enhance infrastructure, LTE services and TV services helping TU progress well in Canadian Telecom Industry.

I reiterate my bullish stance on Telus (TU). The company is making continuous investments in network enhancement and expansion, which help the company strengthen its subscriber base and performance. The company reported strong wireless postpaid subscriber numbers for 2Q14. Moreover, TU's strong revenue growth coupled with its solid EBITDA margin growth fueled its bottom line results. Other than the strong financial performance, the company has been sharing its success with investors through dividends and share repurchases. The company offers a dividend yield of 3.7%.

Thriving in Canadian Wireless Segment
TU is not only surviving but thriving in the highly competitive Canadian Telecom Industry. The company has been consistently investing in its 4G-LTE network to offer best-in-class network services to its customers. At present, with 84% of population coverage, TU's 4G-LTE services have been fueling its postpaid subscriber growth. Also, by offering a wide range of affordable smartphones, the company has served the increasing demand of smartphone users in Canada. By the end of 2Q14, about 79% of TU's postpaid subscriber base was using smartphones.

Although the Canadian government's policy to cancel three-year contacts offered by wireless carriers affected the postpaid subscriber bases of the other two major players, Rogers Communications (NYSE:RCI) and BCE Inc. (NYSE:BCE), TU managed to maintain its strong subscriber base as it retained subscribers by introducing attractive two-year contracts. Also, the company has been consistently offering new variations for its two-year Share Plus plan, which served as a major driver for TU's postpaid subscriber base. TU, with impressive net postpaid additions of 78,000 in 2Q14, outpaced its peers, as shown in the chart below.
Click to enlarge
Source: Companies Quarterly Earnings Report

Also, TU has been constantly improving its network services with continuous investments in network enhancement, which increased customer satisfaction. The increase customer satisfaction is helping TU improve its churn. The company reported a wireless postpaid churn of 0.90% in 2Q14, lower than BCE's and RCI's churn rates of 1.16% and 1.13%, respectively. Owing to the Canadian government's intentions to boost competition among wireless service providers, there is the possibility of a new entrant in the industry, which will increase competition in the industry. Despite the risk of increased competition, I believe TU's future performance is likely to remain strong, as it has been taking the right measures, like network enhancement investments and new contract offering, to strengthen its position in the industry.

The company's wireless segment's performance stays strong. TU reported wireless revenue growth of 6.2% year-over-year, better than BCE's wireless segment's revenue growth of 5.5% and flat wireless revenue growth for RCI in 2Q14. Moreover, TU's strong smartphone subscriber base and increased data services usage due to enhanced 4G-LTE network are positively affecting its ARPU. The following table shows growth in TU's wireless segment's revenues, blended ARPU and postpaid churn for the last six quarters.

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Wireless Revenue (Y-O-Y Growth)

6%

5.5%

4%

3.3%

5.6%

6.2%

Blended ARPU (Y-O-Y Growth)

2%

1.4%

1.7%

1.5%

2%

2.3%

Postpaid Churn

1.11%

1.03%

0.99%

0.97%

0.99%

0.90%

Click to enlarge

Source: Company's Quarterly Earnings Report

I believe that with continuous investments in LTE network expansion and ensuring more data usage through higher smartphone penetration, TU's wireless segment performance will stay strong in the coming quarters.

Wireline Services
Wireline services are facing pressure from growing demand for wireless services and competition offered by cable service providers. Despite the challenges for wireline services faced by the industry, TU has done well to maintain healthy wireline operations. As the company has been focusing on improving the efficiency of its Optik TV and Optik high-speed internet broadband services, demand for its premium Optik TV services and high-speed internet services remains strong. Moreover, in its attempt to moderate the NAL losses, the company has been consistently offering compelling bundle offers. As a result of these efforts, TU's 38,000 combined TV and high-speed net additions outpaced the NAL losses for the 16th consecutive quarter. Furthermore, due to the strong adoption of TV and broadband services, the company's wireline segment's revenues grew by 2.4% year-over-year in 2Q14.

Going forward, as the company remains committed to allocating resources for the wireline segment's growth, including Optik TV and Optik high-speed internet content offerings, this will portend well for its consolidated performance. The following chart shows the combined TV and high-speed net additions offsetting the NAL losses.
Click to enlarge
Source: Company's Quarterly Earnings Report

Given the company's strong operational performance, analysts have anticipated a healthy next five-year growth of 8.05% for TU. The following table shows analysts' next five-year growth expectations for TU, BCE and RCI.

Company

5-Years Earnings Growth Rate

TU

8.05%

BCE

3.42%

RCI

-1.90%

Click to enlarge

Source: Nasdaq.com

Dividends and Repurchases

As the company's financial performance stays strong, it has been consistently returning cash to shareholders through dividends and share repurchases. The company currently offers a healthy dividend yield of 3.7%, backed by its operating cash flow yield of 13.6%. Also, the company has been consistently repurchasing shares, which will positively affect its EPS growth and magnify ROE. In 2Q14, the company spent $188 million to repurchase shares. The company is expected to repurchase $500 million worth of common shares in 2014.

Conclusion
TU has been delivering a healthy financial performance, which is likely to continue in the future. Through undertaking investments to enhance its infrastructure, LTE services and TV services, the company is progressing well in the Canadian Telecom Industry. Also, the company's strategic initiatives to improve its services and compete successfully are helping it strengthen its wireless and wireline operations. Furthermore, the company has been sharing success with shareholders through dividends and share repurchases, which makes it a good investment option for dividend investors. Due to the aforementioned factors, I am bullish on TU.

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