Telus Corporation (TSX:T)(NYSE:TU), one of the largest telecommunication companies in Canada, announced third-quarter earnings results that satisfied analysts’ expectations before the market opened on November 5, but its stock responded by falling over 4%. Let’s take a closer look at the results to determine if this weakness represents a long-term buying opportunity or a sign of things to come.
Strong subscriber growth leads to top- and bottom-line gains
Here’s a summary of Telus’s third-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.
| Metric | Q3 2015 Actual | Q3 2015 Expected | Q3 2014 Actual |
| Adjusted Earnings Per Share | $0.66 | $0.64 | $0.64 |
| Operating Revenues | $3.16 billion | $3.16 billion | $3.03 billion |
Source: Financial Times
Telus’s adjusted earnings per share increased 3.1% and its operating revenues increased 4.2% compared with the third quarter of fiscal 2014. Its slight earnings-per-share growth can be attributed to its adjusted net income increasing 2.8% to $398 million and its weighted-average number of common shares outstanding decreasing 2% to 601 million.
Its strong revenue growth can be attributed to its wireless subscriber base increasing 2.8% to 8.42 million and its wireline subscriber base increasing 1.3% to 5.61 million, which led to its revenues increasing 5.1% to $1.78 billion in its Telus Wireless segment and 3% to $1.43 billion in its Telus Wireline segment.
Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:
- Total customer connections increased 2.2% to 14.03 million
- High-speed Internet subscribers increased 6.3% to 1.54 million
- TV subscribers increased 10.4% to 980,000
- Network access lines decreased 3.5% to 3.08 million
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 2.2% to $1.12 billion
- Adjusted EBITDA margin contracted 70 basis points to 35.5%
- Blended average revenue per user (ARPU) increased 1.1% to $64.22 in its Telus Wireless segment
- Free cash flow increased 41.6% to $310 million
Telus also announced a 4.8% increase to its quarterly dividend to $0.44 per share, and it will be paid out on January 4 to shareholders of record at the close of business on December 11.
Should you buy shares of Telus on the dip?
It was a solid quarter overall for Telus, and its dividend increase was a major positive, so I think its stock should have reacted by moving higher. With this being said, I think the 4% drop represents nothing more than a long-term buying opportunity, especially because the stock now trades at even more attractive forward valuations and because it is a high dividend and dividend-growth play.
First, Telus’s stock now trades at just 16.8 times fiscal 2015’s estimated earnings per share of $2.50 and only 15.2 times fiscal 2016’s estimated earnings per share of $2.75, both of which are very inexpensive compared with its five-year average price-to-earnings multiple of 17 and its industry average multiple of 19.9.
With the average multiples and its 9% long-term growth rate in mind, I think Telus’s stock could consistently trade at a fair multiple of at least 18, which would place its shares around $49.50 by the conclusion of fiscal 2016, representing upside of more than 18% from today’s levels.
Second, Telus now pays an annual dividend of $1.76 per share, which gives its stock a 4.2% yield, and this is significantly higher than the industry average yield of 2.6%. It is also very important for investors to note that it has raised its dividend for 11 consecutive years, and it has a dividend-growth program in place to grow its dividend by another 10% in 2016, making it one of the market’s top dividend-growth plays.
With all of the information provided above in mind, I think Telus Corporation represents one of the best investment opportunities in the market today. All Foolish investors should strongly consider initiating long-term positions.
