Sunday, July 8, 2018

Stock Analysis: - Telus Corporation

Most people wake up and go to work at least 5 days a week.  People trade their time for money.  If you are not at work, you do not get paid. Most people do not think is there a way this way of making a living.

Some of these people have discovered a way of making money besides their job.  If you are reading this article, you are interested in investing.  You do not read a blog about investing by accident.  You are here for a reason.

You cannot walk down a street, take public transit, or visit a coffee shop without noticing the amount of people looking down at their smart phones.  It was not like this until 2007.  In 2007, Apple came out with the iPhone are changed peoples life forever.  The iPhone was the first smart phone without a physical keyboard.  That meant a bigger screen.  Since the release of the iPhone in 2007, the world has changed.  People basically are carrying a computer in their hand.

Nowadays, almost everyone has a smart phone.  Senior citizens are likely the only people who do not have cell phones of any sort.  

In Canada,  we have 3 big communication companies and 1 that is quite large.  The big 3 are Bell Canada Enterprises , Roger's Communications and Telus Corporation.  The other major communication company is Shaw Communications. Shaw Communications is trying to branch into wireless with their purchase of Wind Mobile, which they renamed Freedom Mobile.  Freedom Mobile has a very small foot print and customer base. Freedom Mobile does not have customers nation wide.  



Telus is the local exchange carrier and the telephone provider in Alberta and British Columbia, providing services such as television, Internet, and land line services.  

Telus also is in the wireless communications business.  Telus and its subsidiaries provide wireless services all across Canada. Telus has its own cell phone towers in western Canada and use cell phone towers belonging to their competitor Bell Mobility ( a part of Bell Canada Enterprises) in the rest of the country.  This agreement also allows Bell Mobility to use Telus towers out in Alberta and British Columbia.

Right now, Telus Corporation is installing fiber optics in buildings. For example, my building is wired for fiber optics.  The wiring ends just above the inside of my entry door to my apartment.  If I decide to switch to Telus, a technician would be dispatched with the equipment and would just have to wire form the modem to the fiber optic junction just about my apartment entry door.

More and more people are ending their use of landlines and going to only cell phones for their telephone services.

 The basic cell phone plans allow people to call locally wherever they are and not be charged long distance. Instead of searching for a payphone and individual could use their cell phone to make a local call but would be using air time minutes. They calls they would receive outside their local calling area would be classified as incoming long distance and be charged as long distance.

In recent years, cell phone planes have changed. Now cell phones plans often have unlimited local or national calling and text messaging. This alone has made people drop the land line altogether and just have cell phones.

On May 31, 2017, Telus no longer used CDMA has their type of wireless signal. Their wireless was switched to a more update signal that will allow it to expand and offer better wireless services to its customers. So all the phones and other wireless devices that used CDMA would not longer work.  So their customers either upgraded to newer model phones and possibly switched carriers if a better pricing plan was found.

Telus is upgrading their network in Manitoba, which will mean an large increase in capital expenditures.  Telus acquired about 25% of the customers of Manitoba Telecom Services from Bell Canada Enterprises after Bell Canada Enterprises takeover of Manitoba Telecom Services.

Now, we will look at some fundamentals of the stock.  Telus Corporations trades on the Toronto Stock Exchange and New York Stock Exchange as T and TU, respectively.

As I am in Canada, I will be using the Toronto Stock Exchange stock T for my analysis.

Currently Telus is trading at $47.17 as of the close on July 7, 2018.  Telus pays a dividend of $2.10 per share.  The stock is currently yielding 4.45%.  This yield is 45 bps above the stocks own 5 year average and 155 bps above the broader market.  

The EPS for the trailing twelve months is $2.45.  The dividend payout ratio is 85.7%.  This is rather high so this requires a more in depth look over the past years.  By looking at Morningstar for Telus we see the dividend payout ratio was between 50% to 62% from 2008 to 2013 and then increased afterward.  In the final quarter of calendar year 2014, the price of a barrel of crude oil started to fall.  The price of a barrel of crude oil continued to fall over the next 3 years.  Telus has a large customer base in Alberta and British Columbia.  So, as the price of a barrel of crude oil continued to fall, businesses directly involved in the oil and gas sector started doing layoffs and continued with more layoffs from 2014 to 2017.  The crash in oil prices also affected companies servicing the oil and gas sector which trickled down to hotels and restaurants.  This meant Telus has some customers scaled back their wireless and non-services or eliminated them all together.

The 5-year dividend growth rate comes in 10.1% and the 10-year dividend growth rate comes in 9.6%.

Telus has increased the dividend for 14 consecutive years. Their main competitor in Western Canada, Shaw Communications, has not increased their dividend in about 3 years.

With oil prices rebounding over the past several months trading above $70 a barrel, Telus will strongly benefit from people upgrading the wireline or wireless services.

Now, we will look at some fundamentals over the past 10 years.  Although 3rd party information, like Morningstar is quite accurate, it is best to use the annual reports from Telus to guarantee the correct numbers. The fiscal year for Telus ends December 31, which is the same as a normal calendar year.

Telus grew operating revenues from $9.653 billion in 2008 to $13.202 billion in 2017.  This is a compound annual growth rate (CAGR) of 3.54%.

This CAGR is good considering the amount of jobs that were lost over the past 3 years due to the huge collapse in oil prices and the corresponding layoffs as a result.  Telus is targeting revenue growth of 4 to 6 percent for 2018.  Some of increase in revenue is increasing prices on the current residential and business customers.

Next, we look at EPS over the last 10 years.  Quickly looking at the numbers we see the EPS for 2008 is higher than EPS for 2017.  This is a red flag that required some investigation. Looking at number of shares outstanding which drastically different leads to looking at a 10 year chart of Telus.  We see Telus did a 2:1 stock split around 2013. So, to reflect this we dividend the EPS in 2008 by 2.  Therefore, Telus grew EPS from $1.755 in 2008 to $2.46 in 2017.  This is a CAGR of 3.82%.

This a somewhat good.  Telus has reduced their share count approximately by 10% since 2012.

Besides their major customer base in Alberta and British Columbia being affect by the oil price collapse, these markets were drastically affected coming out of the worst recession  of 2008-2009 since the great depression.

I would expect the EPS to grow over the next couple of years as increases to their average revenue for residential and business customers and as more new customers.  With western Canadian having people migrate from others parts of Canada to find better paying jobs, the demand for Telus services should increase.

Telus has spent money on their build out of fiber to the home.  Telus's wireline division surpasses their main competitor Shaw Communications in this space.  As the increase of fiber optics on their networks means Telus is well positioned for the expansion of 5G networks, which likely be very fiber intensive.

The long term-debt to equity ratio comes in around 1.48.  The interest coverage ratio is 4.54.

The higher the interest coverage ratio the better.  As the economy in western Canada is rebounding with price of oil over $70 dollars. With more people moving to Alberta and British Columbia, the need for Telus's services will increase.  So, I am not too concerned and believe Telus is have no issues with regarding to servicing their debt.

The profitability of Telus remains very consistent.  The loss of customers is offset to the average revenue of ongoing customers increasing. With the economy of western Canada improving, the addition of new customers will make sure the profitability remains stable and possible increase.

Telus has an average annual net margin of 11.03% over the last 5 years.  During this time, Telus had 2 years of negative free cash flow in 2015 and 2016. The average revenue per customer gets reduced as people cut back or eliminate services altogether when the job market is bad.  Telus also  had a lot of capital expenditures with upgrading their networks such as more fiber optics.

The average annual Return on Equity over the last 5 years comes in at 17.39%.

Investing in Telus Corporation has served investors well over the past 10 years. Wire line and wireless communications are a part of everyday life. Customers are looking for quicker and reliable Internet at reasonable prices.

We do not want to over pay for a stock. Ultimately, we want to purchase a stock well below what we think the stock is worth.  By doing this, we have a large margin of safety.  The lower you buy a stock, the higher starting yield which means your money is working harder for you right from the start.

Valuation

The stock is currently trading at P/E of 19.3.  This is in-line with the stock's own 5-year average of 18.4 and much greater than that of the broader market of 15.9.  The industry average P/E ratio  is 18.6.

The stock is basically on par in terms of price to book and price to sales when compared to the stock's own 5-year average.

The stock is currently trading at P/CF (Price to cash flow) of 6.9.  This is on-par with the industry average and lower that the stock's own 3-year average of 7.5.  The current P/CF is lower than the broader market of 9.3
.
The stock does not look appealing at current price of $47.17.

I will attempt to value the stock using a dividend discount model analysis.  I am going to use a discount rate of 10%. I am going to use a dividend growth rate of 6.5% for the first 5 years and 5.5% growth rate for the next 5 years after.   I am using a dividend growth rate lower than the 5-dividend growth rate as I believe the growth of earnings to be smaller over coming years.  

The Dividend Discount Analysis gives me a fair value of $51.42.

I want to compare this to a 3rd party to see if my analysis is reasonable.

Morningstar currently rates it as a 3 star stock.  This would mean the stock is equally valued.

Morningstar has a fair value of $47.00.

I take the average of these 2 numbers to get a fair value of $49.21.

Conclusion:

The stock could be possibly around 4.3% undervalued.

I would not be a buyer currently as I believe the margin of safety is too low.

Disclosure:  I do not own T.TO shares in any of my accounts

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

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