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Analyst Blog

We remain bullish on Telus Corporation (TU - Analyst Report) with our long-term Outperform recommendation following its first quarter results and a strong outlook. For the short term (1–3 months), the stock also retains a Buy rating with the Zacks #2 Rank.

First quarter earnings surpassed the Zacks Consensus Estimate and the year-ago earnings on strong data and wireless revenue combined with healthy Optik TV and Optik high-speed Internet services.

The second largest Canadian telecommunications company expects its 2011 results to be driven by continuous wireless subscriber growth, accelerated wireless data services, increased smartphone sales, growing wireline network as well as reduced financing costs due to lower interest rates.

The company expects consolidated revenue and EBITDA to increase 1% to 4% and 1% to 6%, respectively, from 2010 levels. Earnings per share are expected to grow in double digits in the range of 7% to 19% based on improved operating profits, stable capital expenditures and a significant reduction in both cash taxes and financing costs.

The Zacks Consensus Estimate for fiscal 2011 is $3.93, representing double-digit growth of 20.18% annually, is above management’s expectation.

We are impressed with Telus’ prospects in wireless data growth given new devices, technology upgrades, strong adoption of smartphones, deployment of high speed packet access plus (HSPA+) Dual Cell technology and the expected launch of Long-Term Evolution (LTE) network in 2012, which are all expected to fuel wireless revenue growth.

In addition, popular smartphones like BlackBerry and iPhone (launched in late 2009) will provide Telus competitive advantage over other dominant players such as Rogers Communication (RCI - Analyst Report) and BCE Inc. (BCE - Analyst Report).

On the wireline side, the company’s continued investments to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services will boost its profitability.

Moreover, the company remains committed to deliver attractive returns to shareholders in the form of higher dividend payouts. The company expects payout ratio between 55% and 65% of net earnings over the long term. Telus increased its quarterly dividend by 4.8% to C$0.55 (to be paid in the second quarter) from the last dividend of C$0.525, reflecting the third increase in the last one year.

Further, Telus plans to hike its dividend twice every year until 2013. The dividend increase will be 10% annually. The increased dividend reflects continued earnings growth and strong cash flow ahead.

Hence, the company’s improved confidence related to 2011 earnings and cash flow outlook with cost reduction plans and further investments in broadband infrastructure expansion encourage us to maintain our positive stance on the company.

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