We are upgrading our recommendation on Telus Corporation (TU), the second largest Canadian telecommunications company, to Outperform from Neutral. Currently, the stock has a Zacks #2 Rank (Buy).
Telus appears confident of a profitable 2011 attributable to continuous wireless subscriber growth, accelerating wireless data services as well as reduced financing costs due to lower interest rates.
The company increased its focus on wireless and data business growth and is rapidly expanding its 3G wireless coverage into various markets. Strong adoption of smartphones in the wireless segment and enhanced penetration of Optik TV at the wireline division are boosting data revenue.
Third quarter earnings surpassed the Zacks Consensus Estimate by 8 cents driven by continued investments in broadband wireline and wireless networks.Total revenue inched up 1.8% year over year driven by a 6.3% growth in wireless revenue partially offset by a 2.7% decline in wireline revenue. Telus expects total revenue to grow 1% to 4% from the 2010 level and earnings per share to grow in the double digits, i.e. 9% to 22% year over year for 2011.
Telus spearheads the deployment of the most advanced wireless technology in Canada. We remain impressed by the company’s prospects for future wireless data growth given new devices and technology upgrades, which are expected to fuel growth of wireless revenues.
Management expects wireless revenue to grow 5% to 6.5% in 2011 from its high speed packet access plus (HSPA+) network investments. We believe popular smartphones like BlackBerry and iPhone (launched in late 2009) will provide Telus a competitive advantage over other dominant players such as Rogers Communication (RCI) and BCE Inc. (BCE).
Telus continues to enhance its wireless network capacity and targets a first quarter 2011 launch of its HSPA+ Dual Cell technology, which will double the download speeds at 42 megabits per second on its 3G network. The implementation of HSPA+ Dual Cell technology is expected to facilitate 4G Long-Term Evolution technology.
As part of the ongoing expansion in fiber optic network, Telus also provides compelling home entertainment services in the Western Canadian market. The company made these network upgrades through a $25 billion infrastructure investment across Canada since 2000.
The company is investing another $1.7 billion this year to continue expanding its network and bringing faster Internet and Optik TV to more homes in Alberta and British Columbia. We believe these network enhancements will drive average revenue per user and provide higher synergies from investments in these broadband wireline and wireless networks going forward.
Moreover, the company remains committed to deliver attractive returns to shareholders in the form of higher dividend payouts. Driven by continued earnings growth and strong cash flow, Telus increased its dividend twice in 2010 to bring the annualized dividend to C$2.10 per share. Over the long term, the company plans to achieve a payout ratio between 55% and 65% of net earnings.