Telus Boosts Dividend by 5%

Telus Corporation’s (TU - Analyst Report) raised its quarterly dividend to 61 Canadian cents per share for the second half of the year based on continued earnings growth and strong cash flow.

The second largest Canadian telecommunications company reported strong fourth quarter and fiscal 2011 earnings that increased 11.9% and 9.9% year over year, respectively. Free cash flow climbed, respectively, 77% and 6.2% year over year in the fourth quarter and 2011.  

The new quarterly dividend represents an increase of 5.2% from 58 Canadian cents per share paid in January 2012 and again slated for payment in April 2012, and 10.9% from 55 Canadian cents per share paid in July 2011. Additionally, this is the fifth dividend hike in the past 19 months. The increased dividend is payable on July 3, to shareholders of record on June 8.

The move is consistent with the company’s plan to hike dividend twice every year until 2013. The dividend increase will be 10% annually. The new annual payout of C$2.44 represents a dividend yield of 4.4%. This is higher than the 3.6% yield of Rogers Communication (RCI - Analyst Report) but lower than the 5.5% yield of BCE Inc. (BCE - Analyst Report).

In 2011, Telus raised its quarterly dividend twice with a 4.8% hike at the start of the year and 5.5% at the end. The company paid dividends of 52 and a half Canadian cents per share in January and April and 55 Canadian cents per share in July and October 2011.

We are encouraged by management’s commitment to return value to shareholders through attractive dividends. Telus distributed 62% of the net income in the form of dividends in 2011 compared with 64% in 2010. The company expects a payout ratio between 55% and 65% of net earnings over the long term.

Further, Telus proposed to terminate its dual-class share structure by converting non-voting shares into voting shares to improve trading liquidity. The conversion requires the approval of two-thirds of each of the voting and non-voting shareholders. If approved, the company’s shares will be dual-listed in Toronto and New York for the first time, effective before the dividend record date of June 8. As a result, non-voting shareholders will also be entitled to receive dividends.

We are currently maintaining our long-term Neutral recommendation on Telus. For the short term (1–3 months), the stock retains a Zacks #3 Rank (Hold).

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