Canada’s second largest telecommunications company ended the day with gains just shy of a percentage point.
The reason for the company’s outperformance relates to the news that it had acquired ADT Security Services from U.S. based ADT. ADT Security Services is one of the biggest home security companies in the country.
It marks the second purchase in as many years for Telus which acquired AlarmForce in 2018. Telus agreed to purchase the company for $700 million in cash. The market applauded the move, which will quadruple its current security division customer count. All-cash deals such as these tend to be looked at favorably as it does not result in shareholder dilution.
Telus has approximately 100,000 customers and the ADT purchase will bump up that number by 500,000. As the wireless and wireline divisions are experiencing slowing growth, the security services division is a growth market for the company. In the third quarter alone, the company added 12,000 customers to its security business – a 14% increase.
It also enables Telus to cross-sell its bundle of products, which can help stem the tide of customer churn. Bundles have proven to be an effective strategy for telecoms as they strive to increase customer loyalty.
According to Canaccord Genuity analyst Aravinda Galappatthige
“The objective is to lower churn and price-sensitivity by bundling an increasing number of products at the household level.”
As per its most recent filings, the Canadian operations of U.S-based ADT contributed approximately US$230 million in revenue and is free cash flow positive. If you’re new to buying stocks, free cash flow is simply the company’s revenue from its business operations, minus its capital expenditures, or normal business operating expenses.
Telus has experienced slow gains thus far in 2019
In the past year, Telus has struggled as it eeked out 1% gain. Although this is better than Rogers (-0.7%), it is far below that of industry leader BCE’s 22.44% gain over the same period. The good news, is that this underperformance has led to attractive valuations. Telus is currently trading at a discount to its price-to-earnings, price-to-book and enterprise value to EBITDA five-year historical averages.
Telecoms are an attractive option for income investors. For its part, Telus is a Canadian Dividend Aristocrat with a 15-year dividend growth streak. This is tops in the industry. Out of all the telecom companies, Telus would be the least susceptible to a dividend cut in our eyes.
Over the next few years, Telus has a targeted dividend growth rate in the 7% range. Once again, this is tops in the industry.
In an environment of low interest rates, they also tend to outperform as their business models are predicated on high capital expenditures. Lower interest rates equal lower borrowing costs. Considering the industry move to 5G, declining interest rates should be a positive for Telus and its peers.
*Mat Litalien and Daniel Kent is long Telus.