Telus Payout Plan Shows Confidence

05/29/2013 10:15 am EST

Focus: DIVIDEND

John Heinzl

Reporter and Columnist, GlobeInvestor.com

When a company projects dividend increases several years out, it says a lot about how management sees the future unfolding, writes John Heinzl, reporter and columnist for Globe Investor.

One of the nice things about dividends is that they're predictable. Nobody knows where the market is heading from one day to the next, but many companies raise their dividends on a regular schedule.

A select few even tell you in advance—sometimes months or years in advance—when they expect to increase their dividends. Case in point: Telus (TU).

Earlier in May, the Vancouver-based wireless, Internet, TV, and telephone provider announced plans to raise its dividend twice a year through 2016, at an annual rate of about 10%. In another investor-friendly move, it intends to repurchase up to $500 million of its shares each year from 2013 through 2016.

This wasn't the first time Telus declared its dividend growth agenda in advance. Canada's second-biggest telecommunications company has been delivering semi-annual dividend hikes for several years now, and those increases were also telegraphed ahead of time.

What's the big deal, you ask?

Well, dividend hikes are a strong signal of confidence. When a company projects dividend increases several years out, it says a lot about how management sees the future unfolding.

Telus's predictability is a key reason that I own the shares both personally and in my Strategy Lab model dividend portfolio. It's also why I've decided to spend part of the cash balance in my Strategy Lab account to purchase an additional 15 Telus shares.

Telus's first-quarter results, released the same day as the dividend announcement, are a reflection of the company's strength. Led by revenue increases of roughly 6% in wireless and 3% in its landline division, which includes both high-speed Internet and Optik TV, Telus's profit jumped 13.5%, to $362 million from $319 million a year earlier.

Not only is Telus signing up more wireless customers—its total wireless base rose about 5% year over year to 7.7 million—but average revenue per user (ARPU) is climbing as more customers purchase smartphones and increase their data consumption.

This trend isn't going away. Currently, smartphones represent about 68% of Telus's postpaid subscriber base, but "there's no question that it's headed towards 100% in the fullness of time," Joe Natale, chief commercial officer with Telus, said on the first-quarter conference call.

What's more, the number of Telus Optik TV subscribers, 712,000, was up 29% year over year, while high-speed Internet connections totaled more than 1.3 million, up 7%. These services are often bundled together, with the company gaining roughly one Internet customer for every two TV additions.

No company is without risks, of course. Canada's telecommunications industry is in a state of flux, with Ottawa's policy of fostering more competition having largely failed to achieve its objective.

Telus has agreed to purchase struggling Mobilicity for $380 million, but there are no guarantees the deal will be approved. It's also possible that Ottawa could introduce new rules that favor smaller carriers at the expense of the incumbents Telus, BCE (BCE/a>), and Rogers (ROG). Such regulatory risks aside, Telus has a lot going for it.

"We believe Telus offers something for everyone—growth, dividend increases, share repurchases, a solid balance sheet, and a reasonable valuation relative to large-cap peers," RBC analyst Drew McReynolds said in a note in which he reiterated his "outperform" rating, and raised his price target to $38 from $37.

The stock currrently yields 3.6%. Given its growth expectations, Telus is confident that it can increase its dividend by 10% annually, while maintaining its long-term payout ratio of between 65% and 75% of profit.

It's important to remember that a dividend increase isn't official until it's approved by the board, but by making its intentions public, Telus is putting its credibility on the line. If it doesn't deliver, it will have some explaining to do.

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