The Stock Picker’s Guide to Telus in 2014

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The Motley Fool

Telus (TSX: T)(NYSE:TU) is a market leader in the Canadian telecommunications and media industry with 3.3 million fixed line, 7.8 million wireless, 1.4 million high speed internet and 0.8 million television subscribers.

The company recently reported 2013 full year results that met and exceeded the market expectations. The business produced revenue of $11.4 billion and profit before interest tax and depreciation (“EBITDA”) of $4.0 billion, which was slightly better than the year before. Earnings per share was up by 1% and the dividend per share was increased by 12.5%.

The company continues to perform well in the wireless, internet and television segments but the wireline business continues to struggle as subscribers continue to ditch fixed line in favour of other methods of communication. The wireline business now contributes 35% of the overall EBITDA compared to 45% only five years earlier.

The wireless segment continued its sterling performance, growing the subscriber base by 1.8% over the year and also managing to improve the gross profit margin and the average revenue per user. Similar positive results were evident in the internet and television segments, where subscribers increased by 4.5% and 20.2% respectively. It is worth noting that Telus managed to beat its main competition BCE Inc. (TSX:BCE)(NYSE:BCE) and Rogers Communications (TSX:RCI.B)(NYSE:RCI) in these faster growing business segments in 2013.

Key issues to watch in 2014

The company indicated that it expects to increase revenue by 4-6% and EBITDA by 3-8% during 2014. Growth in earnings per share of 11%-21% is expected and the dividend would be increased by at least 10% in 2014. This profit guidance from Telus is considerable better than the forecasts made by BCE and Rogers.

Among the major risks to the company in 2014 is the outcome of the 700 MHz spectrum auction, which is currently underway and could lead to a high capital acquisition cost and increased competition. Unfortunately the company was not allowed to provide any further update at the time of the recent results announcements and we will have to await the formal public announcements of the outcome.

The attraction of the dividend yield

Telus has managed to pay uninterrupted and growing dividends over an extended period of time. For the past 10 years the dividend has increased on average by more than 15% per year supported by strong free cash flow generation and a solid balance sheet. The company intends to continue to increase the dividend by at least 10% per year until 2016. In addition Telus also intends to spend $500 million per annum in share buyback. At the current market value, this equates to roughly 2% of the shares every year.

Foolish bottom line

The company is a market leader in the key segments in which it operates and has built a considerable and valuable franchise over time. The current valuation of the stock is at a slight premium to its main rivals but it is a market-beating performer with undemanding growth expectations built into the current valuation. The free cash flow generation and dividend payment track record is impressive and this is expected to continue.

At the current 4.0% dividend yield and expectations for further high single digit growth for the foreseeable future, I am comfortable holding an investment in this company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Deon Vernooy holds a position in BCE Inc.

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