Telus (TSX:T) is one of Canada’s telecommunications (telco) companies. It isn’t as big as Rogers (TSX:RCI.B) or Bell (TSX:BCE), and it’s more of a “pure play” telco than those companies are. Bell has branched out into news media. Rogers also has media properties in the form of Rogers Sports and Media. Telus stock is a little pricier than BCE and RCI.B are, and it has a lower dividend yield than BCE does. However, it has the fastest top-line growth of the three big telcos. In this article, I will explore several factors impacting Telus’ business, so you can decide whether it’s right for you.
Factors affecting Telus’ business
There are several factors impacting Telus’ business that anybody considering investing in its stock ought to know about.
The first of these is current interest rates. Canada’s interest rates are high by historical standards, with the policy rate being around 5%. This kind of thing tends to make debt more expensive. Telcos like Telus generally have a lot of debt, and their earnings are being hampered by these high rates. Telus’ last few earnings releases showed marked increases in interest expense, consistent with the preceding general observation. So, high rates are holding back Telus’ business performance in 2024.
The second and more fortuitous factor impacting Telus’ business is competition. There are only three major telcos in Canada, and Rogers just got done buying Shaw, so one of the smaller ones is now off the market. That smaller one was Telus’ acquisition, but the relatively small number of competitors in the Canadian telco space is a positive for these companies’ margins. Unfortunately, Telus’ margins are generally lower than those of BCE and Rogers, so I’m not sure that this company is the one gaining the most from the high margins observed among Canadian telcos.
Recent earnings
In its most recent quarter, Telus delivered:
- $5.2 billion in revenues, up 2.6%.
- $310 million in net income, up 17%.
- $0.20 in earnings per share (EPS), up 17.6%.
- $1.8 billion in adjusted earnings before interest, tax, depreciation and amortization (EBITDA), up 9.4%.
- $590 million in free cash flow, up 82.7%.
- $308 million in interest expense, up 29.4%.
It was a very mixed showing. Although the top line did not grow very much, the growth in earnings and especially free cash flow was quite good for a telco. Given these mixed signals, we should investigate the long-term trend in Telus’ earnings, and see what we find there.
Long-term earnings trend
Telus’ five year compounded annual growth rates (CAGR) in revenue, earnings, and free cash flow were as follows:
- Revenue: 7.25%.
- Net income: -47.9%.
- Earnings per share: -49.6%.
- Free cash flow: 2.6%.
As you can see, not a lot of growth happening here. The top line is growing, but none of it is carrying through to earnings, and very little to free cash flow. Rising interest rates are of course a part of this, but they don’t account for all of it. It looks like Telus has overall issues with cost control.
T stock: The foolish takeaway
My ultimate opinion on Telus is that it is basically investable but maybe not as good a value as BCE and Rogers. It is more expensive than those stocks are going by the P/E and other valuation ratios, yet it is in exactly the same boat they are when it comes to poor historical growth. Rogers actually beat Telus on revenue growth in the most recent quarter, while having a less severe earnings decline and almost as good a free cash flow growth rate. Its multiples are all far cheaper than Telus’ are. I don’t invest in any Canadian telcos personally, but I’d probably pick BCE or Rogers over Telus.
