Why Telus Corporation Is Down Over 1%

Telus Corporation (TSX:T)(NYSE:TU), Canada’s third-largest and fastest-growing telecommunications company, announced its second-quarter earnings results this morning, and its stock has responded by falling over 1% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if this decline represents a long-term buying opportunity or if we should wait for an even better entry point in the trading sessions ahead.

Breaking down the Q2 results

Here’s a quick breakdown of eight of the most notable statistics from Telus’s three-month period ended on June 30, 2017, compared with the same period in 2016:

Metric Q2 2017 Q2 2016 Change
Operating revenues $3,273 million $3,148 million 3.9%
Adjusted EBITDA $1,230 million $1,188 million 3.6%
Adjusted EBITDA margin 37.6% 38% (40 basis points)
Adjusted net income $404 million $415 million (2.7%)
Adjusted basic earnings per share (EPS) $0.68 $0.70 (2.9%)
Cash provided by operating activities $1,126 million $892 million 26.2%
Free cash flow $260 million $126 million 106.3%
Total subscriber connections 12.81 million 12.494 million 2.5%

What should you do with Telus now?

It was a solid quarter overall for Telus, despite the slight drop in earnings, and it capped off a quality first half of the year for the company. Its operating revenues increased 3.4% to $6.47 billion, its adjusted EBITDA increased 5% to $2.5 billion, its adjusted EPS increased 2.2% to $1.42, and its free cash flow increased 103.8% to $477 million. However, the second-quarter results came in mixed compared with the consensus estimates of analysts polled by Thomson Reuters, which called for adjusted EPS of $0.70 on operating revenues of $3.26 billion, so I think that is what’s causing the weakness in its stock today.

With all of this being said, I think the decline represents a very attractive entry point for long-term investors for two fundamental reasons.

First, it’s undervalued. Telus’s stock now trades at just 16.4 times fiscal 2017’s estimated EPS of $2.73 and only 15.5 times fiscal 2018’s estimated EPS of $2.88, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 18.4. These multiples are also inexpensive given its estimated 4.7% long-term earnings-growth rate.

Second, it has one of the best dividends in the market. Telus currently pays a quarterly dividend of $0.4925 per share, equal to $1.97 per share annually, which gives it a lavish 4.4% yield. The company is also on pace for 2017 to mark the 14th consecutive year in which it has raised its annual dividend payment, and it has a dividend-growth program in place that calls for annual growth of 7-10% through 2019, which makes it both a high-yield and dividend-growth play today.

With all of the information provided above in mind, I think all Foolish investors should strongly consider making Telus a long-term core holding.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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