Buy Telus, Rogers and own your problem

Cable and wireless services fees, like bank fees and service charges, drive some people nuts. A simple way to finesse the problem is to buy the company’s stock. Both Telus and Rogers are buys for long-term share price gains as well as attractive and growing dividends. Owning part of that cash flow should make you feel better–and with a bonus. Now you can go to the AGM and complain directly to the CEO.

Telecommunications stock Telus Corp. (TSX─T) is expected to earn more this year and next. The rising profits have let it regularly raise its dividends and buy back its shares as well as reinvest in the business. Telus remains a buy for long-term price gains plus attractive and growing dividends.

In 2016, Telus earned an adjusted $1.556 billion or $2.58 a diluted share. This was up by 7.5 per cent from adjusted earnings of $1.485 billion, or $2.40 a share, the year before.

Telus’ earnings per share rose than more than its total earnings. That’s because it spent $628 million to buy back and cancel shares last year. The company reduced its total weighted average number of shares outstanding by 14 million, to 604 million.

The client base is diversified and growing

Telus’ customers include 8.5 million wireless telecommunications subscribers, 1.6 million high-speed Internet subscribers, 1.5 million residential network access lines, and one million Telus TV customers. The company also says that it’s Canada’s largest healthcare IT [Information Technology] provider. The wireless business is growing fastest. On December 31, wireless data revenue had jumped by 9.9 per cent from a year earlier.

Last year, Telus generated revenue of $12.502 billion from its customers. This was up by 4.2 per cent from the year before. In 2016, the company expects its revenue to grow by two to three per cent, from $12.750 billion to $12.875 billion. This year’s slower revenue growth partly reflects Alberta’s recession.

In 2015, Telus’ unadjusted net income slipped by 0.9 per cent, to $2.29 a share. This year it expects its net income to advance by five to 12 per cent, from $2.40 to $2.56 a share. The market looks at the company’s adjusted earnings per share, since it excludes one-time items. In 2016, the company is expected to earn an adjusted $2.70 a share, up by 4.7 per cent. Next year, it’s expected to earn an adjusted $2.89 a share, up by more than seven per cent.

Telus’ lower unadjusted net income is confirmed by its cash flow. In 2015, it declined by 4.1 per cent, to $3.328 billion. What’s more, Telus’ cash flow fell a little short of capital investment of $2.577 billion and dividend payments of $992 million. The $2.048 billion purchase of spectrum licenses raised the shortfall. Then again, such auctions occur only occasionally and the spectrum could be sold. The company’s shortfall increased further with the share buybacks.

Telus covered the shortfall with borrowed money. Its net debt-to-cash-flow is 3.6 times. While that seems high, keep in mind that it generates stable and predictable cash flow. In addition, higher earnings in 2016 should assist in raising its cash flow.

Telus notes that it ‘returned’ $1.260 billion to its shareholders through dividend payments and share repurchases. It aims to pay out from 65 to 75 per cent of its sustainable earnings as dividends. This ratio is based on what the company expects to earn rather than what it earned over the previous four quarters. The current dividend of $1.76 provides an appealing yield of 4.5 per cent. The company is what’s known as a ‘dividend aristocrat’. In 2016, Telus plans to raise your dividend by 10 per cent.

Communications and media stock Rogers remains a buy

Rogers Communications’ (TSX─RCI.B) earnings per share have sagged in recent years. But the earnings per share are expected to rise this year and next. Rogers remains a buy for further long-term share price gains as well as attractive and growing dividends.

In 2015, Rogers earned adjusted net income from continuing operations of $1.490 billion, or $2.88 a share. This was down 2.7 per cent from $1.532 billion, or $2.96 a share, on the same basis, the year before.

Rogers’ adjusted net income from continuing operations peaked at $1.781 billion, in 2012. Its adjusted earnings per share peaked at $3.42, in 2013. But its total operating revenue has inched up at an average yearly compound rate of 2.1 per cent since 2011.

Rogers’ adjusted earnings are set to rise

This year, Rogers Communications’ adjusted earnings are expected to rise by 2.1 per cent, to $2.94 a share. Next year its earnings are expected to increase by 4.4 per cent, to $3.07 a share. While the earnings per share are expected to move in the right direction, they would remain significantly below their 2013 peak. Rogers trades at forward price-to-earnings ratios of 17 times this year’s earnings estimate and a better 16.2 times next year’s earnings estimate.

Rogers’ expected growth includes the July, 2015, acquisition of Mobilicity for $443 million. This adds wireless telecommunications customers in Toronto, Ottawa, Calgary, Edmonton and Vancouver. The acquisition gives Rogers high-quality spectrum licenses. Mobilicity will contribute throughout 2016. It should also contribute more as Rogers integrates it.

Rogers is what’s known as a ‘dividend aristocrat’. We expect it to continue to raise its dividend each year. The current dividend of $1.92 a share yields 3.85 per cent. That’s a generous return with interest rates at historic lows. At the same time, the yield is not too high. This means that it’s sustainable.

Rogers operates four segments. Wireless is its largest segment. It provides wireless telecommunications services to consumers and businesses. In 2015, this segment generated an adjusted operating profit of $3.239 billion, or 62.5 per cent of the total.

Rogers’ second-largest segment is Cable. It offers cable telecommunications services to consumers and businesses. These include Internet TV and phone services. In 2015 this segment produced an adjusted operating profit of $1.658 billion, or 32 per cent.

Rogers’ third-largest segment is Media. It includes TV and radio broadcasting; specialty channels, multi-platform shopping; publishing; sports, entertainment and digital media. In 2015, this segment’s adjusted operating profit of $116 million was 3.3 per cent.

Rogers’ smallest segment is Business Solutions. It provides “Network connectivity through our fibre network and data centre assets to support a range of voice, data, networking, hosting, and cloud-based services for . . . Canadian businesses, governments, and on a wholesale basis to other telecommunications providers.” In 2015, this segment accounted for just 2.2 per cent of Rogers’ adjusted operating profit.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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