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Telus shows growth after 'most competitive quarter'

Telus has a history of rewarding shareholders with dividend growth, according to Yield Hog panelist Tony Demarin of BCV Asset Management.

SHAUN BEST/Shaun Best/Reuters

The last three months of 2010 were "the most competitive quarter we've ever seen" in the Canadian wireless sector, according to Telus Corp. 's executive vice-president Joseph Natale.

Despite that harsh new reality, Telus Corp. posted solid fourth-quarter earnings on Friday, with profit up 45 per cent. The company also announced a dividend of about 52 cents a share.

The Vancouver-based wireless giant had profits of $227-million and earnings per share of 70 cents, compared to $156-million and 49 cents during the same period last year. Even when adjusted for one-time losses, the profit was still over 40 per cent.

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Mr. Natale made his comment during a call with financial analysts, but top executives at most of the country's entrenched telecom companies have acknowledged the growing aggressiveness of industry players.

Still, Telus, which is battling BCE Inc. and Rogers Communications Inc. as well as a slew of new companies such as Wind Mobile and Mobilicity, managed to grow revenue by more than four per cent to $2.55-billion. The gains, both in wireless and for its new TV product, show the company has positioned itself well to face the sector's competitive chaos.

Perhaps most importantly, Telus grew its wireless average revenue per user, or ARPU - essentially the average monthly bill - by 1.9 per cent in the quarter, the first year-over-year increase in 14 quarters (three and a half years). This comes at a time of near-universal ARPU decline among large wireless providers, as they battle to offset declining voice earnings with increasing data revenue, and as discounting competitors such as Wind Mobile and Mobilicity reduce their pricing power in the market.

Robert McFarlane, Telus's chief financial officer, said the company's strong profit growth in its wireless division - despite somewhat flat subscriber gains - is proof Telus is managing its customer base more efficiently than its peers. Bell, he said, had seen its wireless division profit margins squeezed in the quarter. "I wouldn't be surprised if we're the most profitable in the wireless sector this quarter," he said in an interview.

As Telus continues to capitalize on its costly investment in an advanced wireless network, which it launched in November, 2009 with Bell Mobility, the number of its new premium wireless subscribers continues to grow. Telus added 119,000 new subscribers, with 109,000 of them lucrative post-paid customers - who pay bills at the end of the month, unlike top-up, card-using clients. The post-paid customers are more valuable, since they are more likely to be smart phone users who pay both data and voice bills.

However, this number fell far short of analysts' expectations, and remained unchanged from last year. The overall number of new subscribers also declined by 2.5 per cent, "reflecting increased competition from new entrants," the company said.

Telus's numbers show that Bell likely gained the most wireless market share in the quarter, as both phone companies continue to erode Rogers' wireless lead, which executives at Rogers have long said was unsustainable and likely to be clawed back. Analysts noticed. "While not as strong as the blowout Bell numbers yesterday [at 157,000] it shows that Telus is holding its own and still growing nicely," wrote RBC Dominion Securities analyst Jonathan Allen in a research note to clients.

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He added that the impressive quarterly ARPU growth was a pleasant surprise, given that he and others had been forecasting a decline. "This is a very encouraging sign," he said.

However, the divergence between the two telcos on wireless could be explained by Telus's intense focus on rolling out its new Internet protocol TV (IPTV) service; it is now available in more than two million homes, a goal Bell has set for the end of 2011. And Telus's TV base grew by around 48,000 customers in the quarter to around 314,000; Bell has yet to report numbers for its own IPTV service, which it has just begun launching in Toronto and Montreal.

Some, however, are less bullish on Telus given its strong run over the past year: TD Newcrest analyst Vince Valentini, for example, recently downgraded the stock because he said the big gains have already been made.

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