Telus is no longer a cheap stock, Greg Newman says

Investors have for years been counting on Canada’s telecom companies to deliver solid defensive performance featuring a healthy dividend.

And while that’s certainly true of Telus (Telus Stock Quote, Chart TSX:T), Scotia Wealth’s Greg Newman says that investors should be aware of some issues that could impact the stock, the most notable being more competition ahead for wireless providers.

“As of last quarter, metrics such as average revenue per user and subsidies that they have to do are pointing to an increase in wireless competition,” says Newman, portfolio manager and director of wealth management for Scotia Wealth Management, in conversation with BNN Bloomberg on Monday. “There was a recent CRTC decision to consider opening up to more competition, which could be a headwind a couple of years out.”

“That’s the bad news. The good news is that on Q4, they were executing very well. They beat on wire line subscriber growth, they beat on Internet, they beat on TV, they showed reduced churn. All in, we’re modelling six per cent earnings per share growth on three per cent revenue growth,” he said.

Last month, Telus released its fourth quarter and year end financials, which featured revenue of $3.76 billion, up from $3.54 billion a year prior, and adjusted earnings of $409 million or 69 cents per share, up from $396 million or 66 cents per share a year prior. Those numbers beat the Street consensus on revenue, which called for a top line of $3.69 billion, while matching on earnings.

“Telus delivered strong fourth quarter operational and financial results, concluding another year of robust customer growth, while achieving our annual revenue and EBITDA growth targets for the eighth consecutive year,” CEO Darren Entwistle said.

In keeping with the federal government’s new pledge to bring high-speed Internet to all Canadians by 2030, Telus announced yesterday that it would be investing $40 billion over the next three years in infrastructure spending.

Like the other telcos, Telus’ share price has fared well over this first stretch of 2019, rising 6.9 per cent year-to-date. But Newman contends that it’s now looking a little pricey.

“It’s a defensive, quality, long-term hold and it’s a yield proxy, which is helping with the lower interest rate environment. But at about 15.7x 2019 [earnings], it’s not particularly cheap. It doesn’t have better growth than the other [telecom companies] and there are these headwinds blowing down the road for wireless,” Newman says.

“If you’ve got it, I think it’s fine,” he says. “If I were putting a new name in to do some heavy lifting in the portfolio, it wouldn’t be this one.”