John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Sometimes, even good companies have a bad quarter.
Case in point: Telus Corp.
After sitting at or near the top of the wireless pack for years, the Vancouver-based company suffered a rare stumble in the three months ended Sept. 30. Hurt by the weak Alberta economy, Telus added a net 69,000 postpaid wireless subscribers, missing expectations (of 89,000) and trailing competitors Rogers and BCE (with 77,000 and 77,700, respectively). Predictably, Telus's shares sank on the news. It has recovered some ground but is still off more than 5 per cent since the third-quarter results were released on Nov. 5. On Tuesday, the shares closed at $41.33, down 6 cents.
As a Telus shareholder, both personally and in my Strategy Lab model dividend portfolio, I can tell you that I haven't sold a single share. If anything, I might add to my position if the price falls further.
Here's why I'm sticking with Telus.
The dividend keeps growing
Even as it posted disappointing subscriber results, Telus hiked its dividend by 4.8 per cent to 44 cents a quarter – or $1.76 annually – for a yield of 4.3 per cent. (The new dividend is payable on Jan. 4 to shareholders of record on Dec. 11.) Telus's policy is to raise its dividend twice a year – increases are typically announced in May and November – at an annual rate of about 10 per cent. Although the company's current dividend growth plan extends only through 2016, analysts expect more hikes in 2017 and beyond. "We believe current trends … support a continuation of the company's industry-leading 10-per-cent dividend growth policy over the next two or three years," Maher Yaghi of Desjardins Capital Markets said in a note.
Cash keeps coming
Telus's dividend hikes are backed by growing free cash flow (FCF) – a measure of how much cash is available after capital expenditures. FCF can be used to pay dividends, to retire debt, to repurchase shares or for other purposes. Through the first nine months, Telus's FCF rose to $881-million, up 22 per cent from $720-million a year earlier. Thanks to Telus's strong balance sheet and FCF growth, Mr. Yaghi expects that the company will buy back $500-million of its shares next year in addition to raising the dividend.
The wounds were partly self-inflicted
Another reason Telus's wireless growth lagged is that it chose to focus more on customer retention than customer acquisition. With the so-called "double cohort" of two- and three-year wireless contracts up for renewal, the company felt it could get the most bang for its buck that way. What's more, Telus recently implemented a new system to notify subscribers when they are approaching data usage limits, which may have moderated overage charges and restrained growth in average revenue per user. Telus has one of the lowest customer churn rates in the business – it was below 1 per cent for the ninth consecutive quarter – and the company is willing to make decisions that hurt short-term performance if they build customer satisfaction and loyalty over the long term.
The quarter was hardly a disaster
Despite having the most exposure to Alberta of the Big Three, Telus still managed to capture nearly one-third of postpaid net additions – numbers that "would probably be seen as more than good enough for just about any other carrier," CIBC World Markets analyst Robert Bek said in a note. Although Mr. Bek expects that Telus will "likely continue to give back some of its industry leadership position" in wireless, its wireline division continues to put up solid numbers: Telus reported better-than-expected net additions of 26,000 Telus TV customers and 24,000 high-speed Internet subscribers, more than offsetting the loss of 25,000 residential phone lines. Longer term, Telus is aiming to grow its wireline business with the rollout of its fibre-optic network: This year it announced $1-billion fibre investments for each of Edmonton and Vancouver that will enable ultra-fast download speeds.
The future still looks bright
Even as Telus has made some tough decisions – it's cutting 1,500 jobs to save about $125-million annually – its wireless and wireline businesses still have plenty of growth ahead. What's more, the regulatory and competitive risks facing established wireless players appear to be waning, RBC Dominion Securities analyst Drew McReynolds said in a note. "We do not believe Telus is broken and would take advantage of the pullback," he said.
Closing thoughts
Given the continuing oil price shock, the downturn in Alberta may well continue to exert a drag on Telus's results in coming quarters. If the stock sells off sharply, I will consider picking up additional shares to take advantage of Telus's attractive yield and growing dividend.
