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Why I’m buying more of this telecom stock

The stock may be stuck in a rut now, but I don’t expect that to last forever.

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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Reinvesting dividends is one of the keys to building wealth: It puts the power of compounding in your corner.

Some investors make compounding automatic by enrolling their shares in a dividend reinvestment plan (DRIP). Nothing wrong with that. I like to have more control over my reinvestment decisions, which is why I prefer to wait for a chunk of cash to build up and then decide what to buy. I use this method personally and in my Strategy Lab model dividend portfolio because it allows me to acquire shares of great companies when they are on sale.

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That brings us to today's topic. Having accumulated more than $1,000 of cash in my model dividend portfolio, today, I'll be reinvesting most of it to acquire an additional 20 shares of Telus Corp., bringing my total stake to 155 shares. (I also own Telus personally).

Why Telus? Well, my family has three cellphones with Koodo, a Telus subsidiary, and we've been very happy with the service. Telus generally gets high marks for customer satisfaction, and that's led to some of the lowest turnover rates in the industry.

But it's not just my personal experience that has made me a fan of the company. I'm also attracted to the stock because it's been struggling lately, reflecting the weak Alberta economy and a recent rise in government bond yields that has hurt dividend stocks generally.

Telus's shares are trading roughly where they were at the start of 2015, even as the company has continued to raise its dividend twice a year (more on that in a moment). Result: The yield has climbed to about 4.5 per cent from 3.8 per cent two years ago.

That gets my attention as a dividend investor, particularly given that Telus's results have held up relatively well despite the challenging backdrop.

In the third quarter, the company added 87,000 contract wireless customers, beating the average analyst estimate of about 60,000. What's more, Telus posted average revenue per user (ARPU) of $66.67 a month, up 3.8 per cent year-over-year – the biggest increase among the Big Three telecom providers. As expected, the company also boosted its dividend to 48 cents a quarter – up 4.3 per cent sequentially and 9 per cent from a year earlier.

The disconnect between Telus's solid results and its struggling share price has caught the attention of some analysts.

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"Even in the midst of tough economic conditions, Telus is aggressively managing operating costs and loading profitable customers on its network," analyst Maher Yaghi of Desjardins Capital Markets said in a note. "We like the company's momentum and expect these underlying trends to continue to support an industry-leading dividend growth model."

Vancouver-based Telus has said it intends to continue raising its dividend twice a year (increases are typically announced in May and November) at an annual rate of 7 per cent to 10 per cent through 2019, while targeting a payout ratio of 65 per cent to 75 per cent of net earnings.

Dividends aren't official until the board approves them, but "management has a history of achieving the goals it sets for the company," said Mr. Yaghi, who has a "buy" rating and 12-month target price of $50 on the shares. Telus closed on Tuesday at $42.41.

Telus isn't without its challenges. Heavy capital spending on fibre-to-the-home, lingering economic woes in Alberta and the uncertain impact of Shaw Communications Inc.'s acquisition of Wind Mobile could make Telus's shares "range-bound … in the near-term," RBC Dominion Securities analyst Drew McReynolds said in a note. He has a "sector perform" rating and $43 price target on the shares.

But I believe a lot of these negatives are already baked into the share price and that investors may be discounting the good news. In addition to solid wireless postpaid subscriber growth, Telus added 14,000 high-speed Internet and 14,000 TV customers during the quarter. All told, revenue rose 2.6 per cent and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased by 5.5 per cent to $1.2-billion.

And there's more earnings growth to come. Mr Yaghi estimates that full-year EBITDA will rise 7.8 per cent in 2016, 8.5 per cent in 2017 and 3.4 per cent in 2018. Telus is also forging ahead with the rollout of its ultra-fast fibre network over the next several years to support the growth of both wireline broadband and 5G wireless. Because the company is investing heavily in its business, it currently has negative free cash flow (after deducting dividends). But that will change in a couple of years, Telus chief executive officer Darren Entwistle said on the third-quarter conference call.

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"In 2018, I expect us to turn materially free cash flow positive, and remain free cash flow positive, and grow our free cash flow from that 2018 point forward, normalizing for unique events like spectrum auctions," Mr. Entwistle said.

As an investor looking for growing income, I'm confident that Telus will have the wherewithal to increase its dividend for the next several years at least. The stock may be stuck in a rut now, but I don't expect that to last forever.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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