Is Telus Corporation a Buy After its Q2 Earnings?

Telus Corporation (TSX:T)(NYSE:TU)’s second-quarter earnings were a bit underwhelming, but that doesn’t change the stock’s long-term potential.

The Motley Fool

Telus Corporation (TSX:T)(NYSE:TU) released its quarterly earnings on August 11. The company’s revenues rose just under 4% from the prior year. However, Telus saw its net income decline from $416 million a year ago to $386 million for the current quarter for a decline of over 7%. Earnings per share of $0.64 for the quarter were also down from $0.70 in 2016.

Those are the top- and bottom-line highlights, but let’s dig a little deeper to see more about how the company did and if it is a good investment.

Segment analysis

Telus separates its operations into two main segments: wireline and wireless services. The wireline segment includes internet and television services, while the wireless division includes cell phone-related revenues and expenses.

Each of the company’s segments saw a rise in income, but wireless revenues led the way with $1.8 billion in sales, up 5% from the previous year. Wireline revenues were up to $1.4 billion in Q2 for an increase of 2.5% year over year.

A look at EBITDA by segment reveals a different story. The company’s wireless segment dropped over 1% from the prior year. The wireline segment, however, saw EBITDA climb by almost 4% from the year before.

Increase in subscribers and a low churn rate

Telus saw an increase in its wireless subscribers by over 3% from the previous year. The company’s wireline subscribers saw less change with an increase of just 1% year over year.

Overall churn for the company was just 1%, and the wireless segment saw postpaid churn at just 0.79%. The wireless segment has now seen churn among postpaid subscribers remain under 1% in 15 of the company’s last 16 quarters.

Improved cash flow and dividends

The company’s free cash flow of $260 million was more than double the previous year’s quarter, which had just $126 million. The current quarter’s free cash flow is even more than the company accumulated last year, which was just $141 million in free cash for the full fiscal year.

The company gives back a lot of its free cash to shareholders in the form of dividends. Telus plans to average an annual dividend-growth rate of at least 7% and as high as 10% in good years.

Stock performance

Telus has not seen its shares perform particularly well in the past 12 months; they’ve yielded a return of a just 3%. However, over the past five years, the company’s stock has produced returns of over 37% and outperformed the TSX, which yielded 26% over the same period.

Currently, the stock trades at around 20 times its earnings, which is higher than the 18 times that BCE Inc. (TSX:BCE)(NYSE:BCE) trades at but lower than Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI), which is often at multiples over 30. At a price-to-book multiple of over three, Telus’s stock might be a little expensive to value investors.

Bottom line

Telus has demonstrated that it has, by and large, satisfied its customers by having a low churn rate while still being able to grow its total subscribers. It is a quality stock that can give you a decent dividend, and you’re also likely see some long-term appreciation in the share price as well.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any stocks mentioned.

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