Telus Corporation Upgraded: Is This a Signal to Buy?

Looking for a balanced mix of growth and yield? Then look no further than Telus Corporation (TSX:T)(NYSE:TU), which is well positioned to outperform its larger competitors.

| More on:

North American telecommunications companies are fast shaping up as some of the best investments growth hungry investors can make. The explosion of the information age has made their products and services indispensable for day-to-day life and business activities. This has seen a number of the major North American telecommunications companies report solid fourth-quarter and full-year 2014 earnings that have triggered a round of analyst upgrades.

One of the latest to be upgraded is Canada’s third largest telco Telus Corporation (TSX:T)(NYSE:TU). Money manager Canaccord Genuity reiterated a “buy” rating for Telus and upgraded it to one of its “top picks.”

However, the key questions are what does this mean for investors and should they invest in Telus?

The situation

Telus has built a solid operational base, with 14 million customer connections at the end of the third quarter 2014. One of Telus’ key strengths is that over half of its customer connections are made up of wireless connections, which total almost 8 million subscribers. This is because the provision of wireless services is one of the most profitable segments of Canada’s telecommunications industry.

These numbers also compare favourably to Canada’s other major telcos. Canada’s largest provider of communications services, BCE Inc. (TSX:BCE)(NYSE:BCE), has 21 million customer connections, of which 8 million are wireless. Meanwhile, Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI) is the largest provider of wireless services in Canada, with 9.5 million wireless connections from its total 15 million connections.

This makes Telus the third largest wireless provider in Canada, but more importantly, it is generating a far higher average revenue per unit (ARPU) than either of its larger competitors.

The company has an ARPU of $64.51, which is higher than either BCE’s $61.12 or Rogers’s $59.41 while its wireless churn rate of 1.25% is lower than BCE’s 1.57% and Rogers’s 1.3%. Both of these characteristics highlight that Telus’s wireless operations are far more profitable than either of its major competitors, and it has a far higher retention rate.

Going forward

I also expect to see Telus continue to report solid growth in customer connections, with the company investing heavily in its wireless and wireline networks.

For its wireless services, this includes rolling out its 700 MHz spectrum network and implementing programs to improve system resiliency and reliability. These initiatives will also allow Telus to improve its customer service, thus leading to higher retention rates and higher ARPU, which should see profit margins continuing to grow.

Telus is also expanding its fibre optic broadband network. This will see further data connections that should not only offset revenue lost from declining legacy voice calls but actually generate growth in the wireline segment because households and businesses are increasingly dependent on high-speed data services.

More importantly, Telus has a solid balance sheet that is more than capable of supporting further investment in its wireless and wireline networks. Net debt is only two times earnings before interest, taxes, depreciation, and amortization, and it is highly liquid with $226 million of cash and cash equivalents.

This certainly bodes well for future earnings growth and margins as customer retention and average revenue per connection improve. 

Now what?

However, while Telus appears more expensive than rivals BCE and Rogers, its solid balance sheet and strong growth prospects make it an attractive investment. According to Canaccord Genuity analyst Dvai Ghose, Telus offers a compelling mix of better fundamentals and stronger growth prospects than BCE and Rogers. I couldn’t agree more: Telus offers investors strong growth prospects coupled with a sustainable and tasty 4% dividend yield that will reward investors as they wait for its share price to appreciate.

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 Matt Smith has no position in any stocks mentioned. Rogers is a recommendation of Stock Advisor Canada.

More on Investing

A worker uses a laptop inside a restaurant.
Tech Stocks

2 Promising Growth Stocks to Buy in December 2022

Growth investors had better act fast, because these fire-sale prices won’t last forever. Here are two discounted growth stocks to…

Read more »

Electricity high voltage pole and sky
Dividend Stocks

Should You Buy Algonquin Stock Now or Wait?

Algonquin Power stock has a massive 9.8% dividend yield today! Is now the time to buy or should income investors…

Read more »

A worker gives a business presentation.
Bank Stocks

BMO Stock Rose 6% in November: Is it a Buy Today?

Is it time to buy BMO stock?

Read more »

tsx today
Energy Stocks

TSX Today: Stocks to Watch on Monday, December 5

Canadian stocks may remain volatile ahead of the Bank of Canada’s upcoming interest rate decision due on Wednesday.

Read more »

Double exposure of a businessman and stairs - Business Success Concept

Better Buy: RBC Stock or the Entire TSX?

Royal Bank of Canada (TSX:RY) is a robust stock, but the index fund could be better long term.

Read more »

Family relationship with bond and care

Retirees: 2 Top TSX Dividend Stocks to Buy for TFSA Passive Income

Top TSX dividend stocks now trade at discounted prices for TFSA investors seeking passive income.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Metals and Mining Stocks

Beat the TSX With This Unstoppable Dividend Stock

This dividend stock continues to outpace the TSX and then some, providing you with a dividend that you'll want to…

Read more »

Energy Stocks

Here’s My Top Stock to Buy Now, and it’s Not Even a Question

Tourmaline is a quality energy stock trading on the TSX. Here's why I remain bullish on TOU stock right now.

Read more »