Telus is a solid choice in Canadian telcos, says Barry Schwartz

Over the pandemic, fans of Telus (Telus Stock Quote, Charts, News, Analysts, Financials TSX:T) have been handsomely rewarded for their allegiance, with the stock gaining about 18 per cent over 2020 and 2021 on share price appreciation alone. And while those returns may be small compared to the more high-flying names in the technology space, for example, investors looking for fireworks from a stock like Telus are barking up the wrong tree, as the Canadian telco sector is built for income-seekers and those looking for a more defensive posture in the market.

Safe and solid? Yes and yes, but that’s what you want from Telus, says portfolio manager Barry Schwartz of Baskin Wealth Management.

“Our clients own shares of Telus. It’s more in our balanced and yield-type models,” said Schwartz, speaking on BNN Bloomberg on Thursday. “We manage separate portfolios. We have three different composite models: one for growth, one for balance and one for income, and so Telus is more on the income side.”

Schwartz says Telus has been able to grow its topline at a healthy pace, which is what you want to see even in a defensive stock. 

“It’s exciting because Telus’ revenue growth has been pretty good. I think they put up eight per cent revenue growth in the quarter. Canada’s [telcos] doing great as we know and specifically out West where Telus has more exposure,” he said.

Top and bottom line growth were the name of the game for Telus as it released its first quarter 2022 results last month, with revenue rising 6.4 per cent year-over-year to $4.282 billion and adjusted EBITDA up seven per cent to $1.608 billion. Telus’ adjusted EPS went from $0.27 per share for the Q1 2021 to $0.30 per share, as the company saw cash from operations increase even as capital expenditures went up due to further investments in the company’s 5G network buildout.

“TELUS’ ongoing execution excellence continues to be characterized by the consistent combination of industry-leading and profitable customer growth, yielding strong financial results across our business,” said Telus CEO Darren Entwistle in a press release on May 6.

“Impressively, since the beginning of 2020 and the pandemic period, TELUS has driven leading cumulative revenue and EBITDA growth over the pre-pandemic baseline of over $4 billion and close to $600 million, respectively,” he said. 

Telus also boasted 148,000 in new net customer additions including 46,000 net adds in mobile, which was the company’s best first quarter result in 12 years. Internet net additions were 30,000 and Security net additions were 26,000.

“Since the beginning of 2020, we have welcomed an industry-leading 1.9 million net new customers, including 1.3 million mobile and more than 550,000 fixed net additions,” Entwistle said.

On capex, Telus is now in what it calls the final year of an extensive, accelerated capital expenditure program. The company said it spent $833 million over the Q1 on capex.

And even though Telus’ claims to be concluding its larger network buildout — the company says it has spent a whopping $48 billion since the year 2000 — Schwartz thinks the amount of money needed to keep a telecom in Canada up to speed will always be great.

“I don’t love the fact that it has to constantly spend huge amounts of money building out its fibre network, and that’s going to be to the end of time, but what I’m interested in is it looks like Telus is finally going to be significantly free cash flow positive starting later this year and and for the rest of the year and the rest of the decade, essentially,” Schwartz said.

“So, you should expect significant dividend growth going forward. And for a diversified portfolio [investor] who’s looking for income I don’t think you can go too far wrong owning shares of Telus here,” he said.

Telus’ dividend yield currently sits at about 4.3 per cent, which compares to those from its Canadian telco peers at 5.3 per cent for BCE and 3.1 for Rogers.

In comparing the Big Three telecom companies in Canada, reference is often made to their respective side hustles, which are in media for both BCE and Rogers but for Telus come in the form of technology and IT-related assets.

Telus has TELUS International, its digital customer experience (DCE) vehicle as well as Telus Technology Solutions (TTech), TELUS Health and TELUS Agriculture. TELUS International, for example, saw revenue grow by 19 per cent year-over-year in the most recent quarter to $599 million, with adjusted EBITDA climbing ten per cent to $142 million.