Telus is not a cheap stock, Scotia’s Greg Newman says

If you’re worried about your money being wrapped up in volatile equities, one of the best go-to defensive plays in Canada is the telco space, marked by the Big Three, BCE (BCE News, Stock Quote, Chart TSX:BCE), Rogers (Rogers News, Stock Quote, Chart TSX:RCI.B) and Telus (Telus News, Stock Quote, Chart TSX:T).

Or so the prevailing logic goes.

But while current shareholders are likely to be well-served by owning a name like Telus, there are some definite drawbacks to the stock, according to Scotia Wealth’s Greg Newman.

Is Telus a cheap stock? Not really, says Newman…

“Telus is really not cheap,” said Newman, senior wealth advisor and director of wealth management at Scotia Wealth, to BNN Bloomberg on Thursday. “It trades at around 16x. But it’s got a great dividend which we think is going to grow seven per cent each and every year, and right now, our forecast horizon has got decent EBITDA growth of about six per cent.”

“So, all in, if you’ve got it, I think it’s fully priced. I wouldn’t be buying more. But I think that you can sell calls on it and get a nice second stream of income,” he said.

Telus, which is expected to report its second quarter results at the start of August, fared well in its Q1 in May, generating EBITDA of $1.4 billion, up 8.7 per cent year-over-year and EPS of 75 cents per share, up from 73 cents a year earlier and equaling analysts’ consensus forecast of 75 cents. On revenue, Telus came in with $3.51 billion, up from $3.38 billion a year prior and also equaling the consensus $3.51 billion. At the same time, the company raised its quarterly dividend to 56.25 cents per share, up 3.2 per cent, and currently translating to a yield of 4.65 per cent.

In his company’s quarterly statement, CEO Darren Entwistle chose to highlight Telus’ customer loyalty, pointing to a record low mobile phone churn of 1.02 per cent for the quarter.

“This unrelenting commitment to our Customers First promise is buttressed by our meaningfully differentiated product offerings, as well as the ongoing significant investments we are making synergistically in our world-leading broadband network and technologies across both our wireless and wireline operations,” said Entwistle.

Over the past month, each of the three telco companies took the step of getting rid of overage charges, a move aimed at keeping that customer loyalty yet one which is likely to impact their revenue streams for the foreseeable future, says Newman.

“The Big Three are all facing slower revenue growth because of slower growth of prepaid, and it’s the lower price segments of the market where all the growth is, like regional players like Quebecor,” Newman said.

“Their recent move to eliminate overages and unlimited pricing is a short- and medium-term negative for free cash flow,” he said.