Dividend Stock Analysis of TELUS Corporation (USA) (TU)

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Canadian telecom stocks have been dropping in price ever since Verizon Communications Inc. (NYSE:VZ) announced that it plans to buy WIND Mobile. Rogers Communications Inc. (USA) (NYSE:RCI) and TELUS Corporation (USA) (NYSE:TU) have been hit the hardest because a large portion of their income is from wireless communications, which Verizon Communications would compete for. With the recent drop in prices, Rogers Communications is getting close to my target price. So, I thought it would be a good time to review TELUS.

Dividends

A quick look at the Canadian Dividend All-Star List tells me that TELUS Corporation (USA) (NYSE:TU) has increased its dividend for nine consecutive years in a row. The most recent increase happened with the dividend recorded last month (June 2013) when it increased the quarterly dividend 6.3% from $0.32 to $0.34. There was a recent 2:1 stock split so the previous dividend of $0.32 was actually $0.64, but I adjusted it to $0.32 for the 2:1 stock split. The dividend table below has not been adjusted for the 2:1 stock split in 2013.

Dividend growth

As you can see from the table below, TELUS Corporation (USA) (NYSE:TU) shows good average annual dividend growth rates.

Estimated future dividend growth

Analysts expect annual EPS growth to be 8% for the next five years. Accepting this EPS growth rate and using a payout ratio range of 65% to 75% would result in annual dividend growth ranging from 8% to 11.1%. The company recently announced that it plans to increase its dividend twice a year for three years with an average annual growth rate around 10%. This is in-line with my range of 8% to 11.1%, so my guess is that it will be around 10%.

One thing to point out is that the analysts’ estimate of 8% annual EPS growth rate for the next five years likely hasn’t been adjusted for the Verizon Communications Inc. (NYSE:VZ) entry. This rate might drop a bit in the future once analysts make adjustments for Verizon. In the short-term, I don’t think it will affect EPS much if at all, but in the long-term, Verizon may have a negative impact.

Competitive advantage & return on equity (ROE)

TELUS Corporation (USA) (NYSE:TU) has a decent return on equity. I’d like to see it stabilize and trend upward.

TELUS Corporation (USA) (NYSE:TU) has a ROE that is well above the Wireless Communications industry average of 11.9%, but when compared to its Canadian competitors, it falls a little short. I threw in Verizon Communications out of curiosity, but right now, I wouldn’t consider it a major competitor in Canada.

I would consider TELUS to have a narrow economic moat. There are only a few key players in the industry, but the industry is highly competitive. While it may be difficult to enter the industry, the current competition is strong enough to take away a significant competitive advantage.

Valuation

Morningstar currently rates TELUS a 4-star stock as it is currently priced under their estimated fair value of $38. For Morningstar to rate TELUS as a 5-star undervalued stock, the price would have to fall below their “consider buy price” of $26.60.

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