With the market experiencing a bit of a cooling off in January, investors are beginning to wonder whether there are stocks on the market that might be worth picking up. One company that might be worthy of consideration is Telus Corporation (TSX:T)(NYSE:TU).
In August, I started noticing details in Telus quarterly results that left me a little concerned. Specifically, the company’s debt had increased so significantly that its financing charges were eating into its cash flow.
Fast forward to November 2017, which saw Telus reporting an incredibly strong third quarter. Its operating revenue had increased to $3.366 billion, with a 4.4% improvement to its adjusted EBITDA, or $1.2 billion.
In total, Telus added 152,000 new customers, with 124,000 new wireless subscribers, 19,000 high-speed Internet subscribers, and 9,000 TELUS TV subscribers. Further, its blended average revenue per use increased by 3% to $68.87.
Not only had it added more customers and charged them more, but its wireless division reduced its monthly churn to only 0.86%, an eight-basis-point drop. Telus is notorious for its customer service, which limits the number of clients that get fed up and turn to a new provider.
Again, something jumped out in the quarterly results. Telus also reported in the quarter that it had net debt of $13.4 billion, up by $1.2 billion from a year prior. Equity investors fear debt because in times of bankruptcy, lenders get first dibs on any asset sales before equity investors.
A couple of numbers in particular jumped out.
First, the fixed-rate debt as a proportion of total indebtedness was 89%. In Q3 2016, that ratio was 95%. This means that 6% of its total debt is on a variable rate versus a fixed rate. This is problematic because interest rates are increasing. Should that continue, it could eat into cash flows.
Second, financing costs increased by 15% from Q3 2016 to Q3 2017. More specifically, it paid $129 million in Q3 2016 and $149 million in Q3 2017. If those trends were to continue, this company would be paying hundreds of millions of dollars per quarter in only a few short years.
Thus, we return to the conversation of whether investors should be buying Telus Corporation.
One of the main reasons that investors have wanted to own this stock is because of its incredibly lucrative yield that management continues to increase. In Q3, management boosted the dividend from $0.4925 per quarter to $0.5050. At this rate, investors are earning a 4.43% yield, which is quite lucrative.
However, in the same way that rising interest rates hurt Telus because it will have to spend more on interest payments, it also hurts the stock.
Why? With interest rates at historically low numbers, investors who would have chosen safer income investments were forced to invest in dividend stocks to get any sort of income. Now that interest rates are increasing, investors will begin to move to safer assets, thus depressing shares of dividend stocks.
The answer to the question regarding owning Telus is ultimately a resounding no, right? Well, not exactly. Owning a piece of a business with an incredibly strong economic moat is often a great idea. Nevertheless, there might be more downward pressure on Telus over the coming quarters. And we don’t yet know whether its interest costs have increased even more in Q4.
I believe that Telus is a solid income stock and might prove to be a great investment. Just invest slowly and average down if shares continue to drop in price.
