Telus House


Writer’s Notice: All figures listed in Canadian {Dollars} except in any other case famous.

Funding Thesis

After years of intensive capital funding, TELUS Company (NYSE:TU) is nearing the tip of its large fibre-to-the-home (FTTH) buildout. By the tip of 2022, TELUS is anticipated to have accomplished roughly 85%-90% of its focused broadband footprint. The corporate can now notice the advantages of this funding, as TELUS’s full transition to fibre infrastructure will assist margin enlargement and improve common income per consumer, or ARPU. The completion of this program anticipated in 2023, will release vital free money stream to fund progress via acquisitions, improve the dividend and deleverage the steadiness sheet.

Whereas nonetheless producing constantly robust wireline and wi-fi working outcomes, TELUS’s capital intensive construct out and its speedy enlargement into ancillary ventures via acquisitions has left the corporate’s steadiness sheet and dividend payout ratios stretched. The discount in capex of roughly $1B from 2022 to 2023 will contribute to free money stream almost doubling in 2023. Along with dividend progress and deleveraging, this free money stream will allow TELUS to proceed the event of its promising well being, agriculture and TELUS Worldwide ventures. This can end in TELUS having extra diversified and resilient earnings, which can command the next valuation a number of.

Firm Profile

TELUS is among the three giant telecom suppliers in Canada that accounts for nearly 90% of the $53B telecommunications market. TELUS is the dominant wireline supplier in Western Canada, the place it competes with rival Shaw Communications Inc. (SJR). As a nationwide wi-fi provider, TELUS competes with BCE Inc. (BCE) and Rogers Communications Inc. (RCI). TELUS serves round 9.2 million wi-fi subscribers and a couple of.1 million linked gadget clients.

Headquartered in Vancouver, Canada, TELUS was fashioned via the privatization and merger of the government-owned Alberta Authorities Phone company and BC Tel. With a market capitalization of CAD $38B, TELUS trades on each the TSX and the NYSE below the image “T” and “TU” respectively with every day common quantity of two.4 and 1.5 million shares respectively.

TELUS has advanced from its core wireline and cellular enterprise to develop connectivity and expertise options throughout a number of industries. In 2021, TELUS Company spun off TELUS Worldwide (TIXT), a supplier of digital options. TELUS has retained a 55% financial curiosity in TELUS Worldwide, which now accounts for roughly 15% of whole TELUS Company income. For a more in-depth have a look at TELUS Worldwide please see my full evaluation “TELUS International: Broad Based Growth With Attractive Valuation”.

Utilizing TELUS Worldwide as a mannequin, TELUS Company has been scaling up operations in its agriculture and shopper items division together with its TELUS Well being division. The latter lately expanded via the $2.3B acquisition of LifeWorks, Inc., previously often called Morneau Shepell, a supplier of office wellness advantages to employers. These enterprise traces promise increased progress than TELUS’s core enterprise and their growth and eventual reorganization will assist a premium valuation when in comparison with TELUS’s telecom friends.

Fibre-to-the-Dwelling Construct Out

Since 2000, TELUS has invested roughly $220B in infrastructure and spectrum. The agency’s large funding in infrastructure has enabled TELUS to offer greatest in school excessive pace web speeds, tv and residential safety to properties and companies. In March 2021, TELUS introduced plans to speed up $1.5B of capital spending slated for 2021 and 2022. Accelerated capital invested through the third quarter of 2022 and first 9 months of 2022 was $226 million and $691 million, respectively. This funding has moved up the timeline on the corporate’s capital plan together with its FTTH program and its copper-to-fibre-migration program. As at September 30, 2022, 2.9 million households and companies in B.C., Alberta and Quebec have been linked with fibre-optic cable, up from 2.6 million households on the finish of Q3 2021. The FTTH technique has been successful for TELUS because it has been taking market share from competitor Shaw in its wireline section.

Capital Necessities Shrinking

On the Q3 2022 earnings name, Administration reiterated the expectation for a discount in capex from $3.5B in 2022 to $2.6B in 2023, leading to a rise in free money stream from $1.3B in 2022E to an estimated $2.6B in 2023. This $2.6B consists of $100M in capex associated to the acquisition of LifeWorks. Taking out the capex associated to this acquisition, the capex forecast going ahead to 2023 and past is a full $1B much less yearly than in 2022. This has the quick results of growing free money stream from roughly $1.3B in 2022 to an estimated $2.6B in 2023, in response to a latest estimate from RBC Capital Markets.

In his 2022 letter to investors, TELUS CEO, Darren Entwistle spoke to the inflection level TELUS has hit in its capital necessities and the ensuing free money stream:

Commencing in 2023, we’re focusing on a big decline in our annual capital expenditures to $2.5 billion, or much less. Free money stream can be strengthened by the anticipated capex decline of roughly $1 billion over 2022, along with robust ongoing EBITDA enlargement.

TELUS’s consolidated capex depth is forecast to lower from 19% in 2022 to 13% in 2023, this compares to 16%-17% Canadian telecom friends. On the wireline facet, this modification is much more dramatic, with TELUS being the primary within the trade to see a dramatic drop off in wireline capital. BCE will begin to see reductions in the direction of the center of the last decade, nevertheless their wireline capex depth will nonetheless be roughly 10% increased than TELUS’s over the subsequent few years.

Wireline Capex Spending

Wireline Capex Spending (RBC Capital Markets)

Supply: RBC Capital Markets

Finishing this main capex endeavor leaves TELUS higher positioned than its rivals to construct out its 5G community. Not solely will TELUS have the free money stream to decide to the event of its 5G community, it should even have a multiyear head begin over BCE and Rogers via its capital availability.

Income Diversification Technique

Company technique throughout the Canadian Telecom sector has been pushed by how greatest to reinvest the surplus revenue from the protected wireline and wi-fi companies into areas over increased progress. The three companies accounting for 90% of the wi-fi market in Canada, the trade is actually an oligopoly. What differentiates TELUS from its friends, BCE and Rogers is the way it has pursued diversification.

Whereas BCE and Rogers have invested in media, TELUS has seemed to leverage its expertise to enter new markets and new sectors. The pandemic demonstrated that well being, agriculture and expertise companies that TELUS has developed, have confirmed extra resilient than the sports activities, media and leisure companies that Rogers and BCE have expanded into.

Dividend Progress

In line with its multi-year dividend progress program, on November 4th, 2022, TELUS elevated the quarterly dividend to $0.3511 per share. This quarterly dividend displays a rise of seven.2% from the $0.3274 per share dividend declared one 12 months earlier. At present ranges, the corporate is yielding slightly over 5%. 2022 marks 18 consecutive years of dividend will increase incomes the corporate’s dividend a 20-year CAGR of seven.5%. This constant progress far outpaces TELUS’s friends within the telecom sector.

Canadian Telecom Dividend Growth

Canadian Telecom Dividend Progress (Writer)

Graph Supply: Writer, Information Supply: Canadian Dividend All-Star List

Whereas the corporate has demonstrated great progress and consistency, the payout ratio has grow to be stretched. Dividends on widespread shares in 2021 have been roughly $1.7B, of which $624M was reinvested via DRIP. The corporate’s payout ratio in 2020 was 67%, earlier than ballooning to 140% of free money stream in 2021. Following the step down in capex subsequent 12 months, free money stream much less dividends ought to surge from roughly $300M in 2022 to roughly $1.6B in 2023 and $1.9B in 2024 in response to consensuses estimates.

Telus Free Cash Flow Projections

Telus Free Money Stream Projections (RBC Capital Markets)

Supply: RBC Capital Markets

In keeping with Fairness Analyst Matthew Dolgin with Morningstar:

With a payout ratio hovering round 100% of free money stream (which excludes spectrum purchases), we consider the dividend coverage is slightly aggressive and such ranges of annual will increase possible cannot be maintained. Nonetheless, as a result of we don’t consider the agency is forgoing different funding alternatives or placing itself in a harmful monetary place, we don’t see the coverage as overly problematic.

TELUS has a focused money dividend payout ratio of 60%-75% of free money stream. With TELUS nearing the height of its capital spending, its dividend protection ratio ought to average considerably over the subsequent few years. Over the long run, TELUS has demonstrated a sexy and accountable tempo of dividend progress. Whereas the final two years of progress have stretched the payout ratio, I see this coming again to focus on vary shortly. With almost 20 years of dividend progress, TELUS wasn’t considering pausing their dividend streak for what the agency noticed as a brief money stream problem.

Danger Evaluation

On November 29, 2022, DBRS Morningstar downgraded TELUS’s debt ranking to BBB from BBB [HIGH]. This downgrade was largely the results of TELUS’s June 2022, announcement to accumulate LifeWorks, Inc. for roughly $2.3B and the idea of $600M in debt. Following this acquisition, TELUS is poised to have a web debt/EBITDA ratio within the neighborhood of three.77X in contrast with 3.33X on the finish of 2021.This compares to BCE and Rogers with leverage of three.2X and three.4X respectively. Inside the subsequent few years, the corporate ought to be capable of obtain its focused web debt/EBITDA vary of two.2X – 2.7X. The rankings company did verify that each one traits have been modified to steady from damaging and that the corporate’s present leverage is satisfactory to facilitate spectrum purchases, pursue acquisitions, proceed with community funding and proceed growing dividends within the high-single digit vary.

Inherent dangers to telecom companies embrace regional competitors, the specter of extra onerous regulation from the Canadian Radio-television and Telecommunications Fee. Whereas the specter of new regulation is a continued danger to the protected, high-barrier-to-entry Canadian wi-fi trade. Additional income diversification from this core enterprise section reduces general impression of regulatory danger.

Past these normal working dangers, the important thing concern for TELUS is the efficient execution of its diversification technique. Ought to the corporate overspend on an acquisition, or fail to unlock worth from its new enterprises, its non-core companies might find yourself being pricey distractions from TELUS’s main wi-fi and wireline companies. As TELUS continues to diversify away from its core wi-fi and wireline companies, it’s valuation will even grow to be more durable to match to its friends.

Backside Line

Already the perfect in school identify within the Canadian telecom trade, TELUS has positioned itself to steer the pack into the 5G period. With its FTTH capital expenditures considerably full, TELUS will generate meaningfully extra free money stream. This free money stream will serve to fortify the corporate’s steadiness sheet and supply visibility in the direction of continued dividend progress. I’m a long-term holder of TELUS and can proceed so as to add to my place.

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