Slowing wireless growth has some investors worried about Telus (Telus Stock Quote, Chart TSX:T) but there’s a good chance the stock will track higher, says fund manager Teal Linde, who argues that the market has a penchant for companies with healthy free cash flow like Telus.
Telus shareholders should be pleased with the stock’s performance over the first stretch of 2019. Since bottoming out at $44.47 on Christmas Eve, Telus spent the next four and a half months climbing to a record high of $50.61 by April 16, a 13.8-per-cent increase.
The stock has trailed off a touch since, in part due to investor reaction to its first quarter results delivered on May 8. There, Telus showed a quarterly profit of $437 million, up from $412 million a year prior, on operating revenue of $3.51 billion, up from $3.38 billion in Q1 of 2018. On an adjusted basis, the company earned $0.75 per share, which equaled analysts’ expectations at $0.75 per share.
But a slow-down in wireless service revenue growth (down to 1.4 per cent year-over-year in comparison to last year’s four per cent), the telecom company’s main growth generator, was cause for concern. Telus reported 11,000 new mobile customers over the January to March period.
Yet Telus upped its quarterly dividend by 3.2 per cent to $0.5625 from $0.545, with management saying that by 2020 its dividend payout will be based on 60 to 75 per cent of free cash flow, an upgrade from 65 to 75 per cent.
“This range will enable Telus to continue to make the strategic investment necessary in our advanced broadband network and quality customer growth that underpin our ongoing profitability and significant free cash flow expansion,” said CEO Darren Entwistle.
Linde says the change bodes well for the stock going forward.
“Right now, free cash flow per share is about $1.80 [but] the free cash flow is expected to double over the next three years if the payout ratio is at the 75 per cent level,” says Linde, who is President and Founder of Linde Equity, to BNN Bloomberg on Tuesday. “What this means is that the stock probably has some upside because the market seems to like companies that can generate a low of free cash flow. You saw that with Boeing and you see it with other examples.”
“I see Telus’ free cash flow improving and that could justify the share price climbing higher than where it is today over the next two to three years,” he says.
The five-year return on Telus is currently 23 per cent, while its dividend yield stands at 4.5 per cent. Management has guided for a dividend growth rate of seven to ten per cent for the next three years.
Linde says, “We own Telus in our equity fund. Even though it’s near its all-time high, I think that if you don’t own it today you could probably open a position in it.”