TELUS Corporation

Maher Yaghi, CPA, CMA, CFA, Analyst

Strong consolidated EBITDA growth.
Attractive current dividend yield of ~4.5% and the highest dividend growth among large caps in the industry.
Solid increase in free cash flow due to deceleration of capital expenditure program.

TELUS is a Vancouver-based telecommunications company which offers a full range of wireline and wireless services. Its operations are focused on the western Canadian provinces and eastern Québec, and generate revenues in excess of C$13b per year. Over the years, the company has grown mostly through free cash flow (FCF) reinvestment rather than mergers and acquisitions (M&A), unlike its large-cap peers.

We expect TELUS's EBITDA growth to rank well in the industry in 2018, given the company's strong trends in subscriber metrics. TELUS forecasts EBITDA growth in the 4–7% range in 2018, vs 2–4% for BCE and 5–7% for Rogers. There are several reasons for this. First, the company has an attractive revenue mix, generating a large proportion of EBITDA from wireless, and a rather small exposure to the declining TV market. Indeed, the overall wireless market in Canada remains healthy due to favourable demographics and improving wireless adoption. Second, it continues to have a competitive advantage in its wireline footprint because of the high quality of its growing fibre network. Finally, the company has an industry-leading wireless churn, which is a good proxy for overall customer satisfaction. These factors more than offset the current pressure on the legacy home phone business as the company is able to sell wireless services to substitute for traditional phone services.

We expect TELUS to pay ~88% of its FCF in dividends in 2018, representing a solid improvement over last year's 112% in spite of its 7–10% annual dividend growth, which is unmatched among large caps. This expected improvement results from strong EBITDA growth, as well as the year-over-year reduction in capital expenditure deployment. The company had chosen to make massive investments in its fiber-to-the-home (FTTH) network during years when capital costs were historically low, which we believe was the right strategy. In addition to this top-quality wireline network, the company's network was recently named Canada's fastest, which should further support customer satisfaction. Net debt to EBITDA currently stands at 2.7x—a manageable ratio that we expect will start decreasing toward the end of 2018.

TELUS posted a strong wireless performance in recent quarters, which should support future profitability. We also note that TELUS has seen little to no impact from Shaw Communications' (its main competitor in western wireline) launch of a new TV product, which we view as a sign of the attractiveness of TELUS' products.

TELUS trades at a 0.4x discount vs BCE and in line with its Canadian telecom peers on an EV/FY2 EBITDA basis, despite its industry-leading EBITDA and dividend growth; we therefore believe there is room for multiple expansion. At current levels, TELUS's shares offer an attractive dividend yield of ~4.5%. Our valuation for TELUS is based on the average of a discounted cash flow and net asset value, which generates our target price of C$52.00.