Telus Corporation Shares Fall 4% Despite Solid Q3 Results: Should You Buy on the Dip?

Telus Corporation (TSX:T)(NYSE:TU) released strong third-quarter earnings on November 5, but its stock reacted by falling over 4%. Should you buy on the dip?

| More on:

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:

  1. Total customer connections increased 2.2% to 14.03 million
  2. High-speed Internet subscribers increased 6.3% to 1.54 million
  3. TV subscribers increased 10.4% to 980,000
  4. Network access lines decreased 3.5% to 3.08 million
  5. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 2.2% to $1.12 billion
  6. Adjusted EBITDA margin contracted 70 basis points to 35.5%
  7. Blended average revenue per user (ARPU) increased 1.1% to $64.22 in its Telus Wireless segment
  8. 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.

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 Joseph Solitro has no position in any stocks mentioned.

More on Dividend Stocks