Is Telus Stock a Buy Right Now After a Significant Period of Consolidation?

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The two halves of 2022 are shaping up to be quite different. The first half saw value plummet as stocks across counters crashed. While growth stocks bore the brunt of the crash, value stocks also took a beating. Savvy investors would have identified stocks trading at bargains and added a few recession-proof stocks, solid growth stocks, and/or stocks that can handle inflation, to their portfolios.

Telus, one of Canada’s most significant telecommunications players, is now trading at almost the same price it was at, at the beginning of the year. It is down around 10% from where it was four months ago, but this stock is so solid that it never fell like the others. It has been coasting along in the same range-bound price.

The company released its earnings for Q2 2022 earlier this month, and it beat EPS estimates. Could the Telus stock be in for a bull run after a significant period of consolidation?

Is Telus Stock a Buy Right Now After a Significant Period of Consolidation?

Strong Q2 Numbers

EPS (Earnings Per Share) came in at $0.32 compared to an estimate of $0.29. Consolidated operating revenues and other income came in at $4.4 billion, or 7.1% higher than the same period in 2021.

Telus recorded an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of 8.9%. Net income rose 45%. These are impressive numbers when considering global challenges, including higher inflation, a looming recession, and supply chain issues.

The company said this growth was driven by higher service revenues in its TELUS technology solutions (TTech) and Digitally-led customer experiences – TELUS International (DLCX) segments.

The company said, “TTech service revenue growth was driven by higher mobile network revenues, increased internet and data service revenues, growth in agriculture and consumer goods service revenues, and health services revenues. Increased DLCX revenues resulted from organic growth from both expanded services for existing clients and growth from new clients.”

Its numbers show that its total Mobile and Fixed customer growth for Q2 2022 was 247,000, up 24,000 since Q2 2021. It was the company’s strongest second quarter on record.

Its growth in the mobile space was especially impressive. It recorded 185,000 net additions. Mobile phone net additions came in at 93,000, up 5% compared to Q2 2021. Connected device new additions came in at 92,000, up 10% compared to the same period in 2021.

Q2 2022 saw ARPU (Average Revenue Per User) grow at 2.1% year-over-year. And in a heartening sign, the company said, “This was supported by higher roaming revenues that are now at 100% of pre-pandemic levels.”

LifeWorks Acquisition

In mid-June, Telus signed a $2.9 billion agreement, including debt, to acquire LifeWorks as it looks to expand its footprint in the employee wellness and healthcare services space.

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LifeWorks, previously Morneau Shepell, is an HR firm supporting companies in employee and family assistance plans. It also offers services for absence management, pension and benefits administration, and retirement planning.

Telus Health has a robust digital footprint. It offers patients virtual care and provides them with online pharmacy options and home health monitoring. Telus CFO Doug French said, “This transaction is financially compelling and strategically attractive to Telus, and a natural complement to Telus Health.”

Telus Health reported good growth for Q2 2022. Its health care programs cover over 22 million patients and have grown 24% year-over-year. It executed 145 million digital health transactions in Q2, up 6% over Q2 2021. Its total virtual health care memberships are at 3.6 million, an increase of 64% since the corresponding period in 2021.

On the Flipside

While all these numbers look good, one key point to factor in is Telus’ high dividend payout. The company’s dividend payout ratio is at 56%. This means that a couple of bad quarters could cause many problems to investors expecting passive income.

Telus reports a $5 million drop in its free cash flow to $205 million from Q2 2022. It said, “…strong EBITDA growth was partially offset by our higher capital expenditures planned as part of our prefunded accelerated broadband build program.” It has a target of $1 billion to $1.2 billion for 2022 and a target of $3.4 billion for its 2022 CAPEX. The company has available liquidity of $1.5 billion as of June 30, 2022.

Its debt-to-EBITDA leverage ratio for Q2 2022 is 3.23x, up from 3.11x 1 in Q2 2021. The reason it has gone up is that Telus acquired spectrum licenses. If it didn’t reach them, its net debt-to-EBITDA leverage ratio in Q2 would have been 2.76x.

We are concerned with the cash flow numbers. What happens if a recession hits the economy? Will Telus be able to continue to pay the same dividend? Will its cash flow be affected? The answers to the last two questions are “Unlikely” and “Most certainly”.

However, most analysts think Telus will fare well in the coming months of 2022. Telus stock closed on August 16 at $30.31, and the average analyst target price for the stock is $34.27, a potential upside of around 13%. Add the dividend yield of 4.5%, and you can look at potential gains of about 17.5%.

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