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Assignment

Telus Corporation: Dividend Policy

Submitted to:

Sir Asim Ilyas

Submitted by:

Muhammad Qasim 11223003

Date:

26/6/2013

Gift Business School

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TELUS CORPORATION: DIVIDEND POLICY

TELUS History

TELUS is a national telecommunications company in Canada which formed in February 1999

with the merger of two carriers Alberta-based TELUS and BC Telecom that provides a wide

range of telecommunications products and services including internet access, voice,

entertainment, video, and satellite television. For more than 100 years, TELUS has been

delivering innovative telecommunications solutions to Canadians. Our dedication to improving

the lives of Canadians has helped us spread our roots from British Columbia and Alberta to

become the country's second largest telecommunications company.

A 51 percent owner of BC TELECOM,U.S-based GTE Corporation was diluted down as a result

of the merger to an interest of approximately 25 percent.GTE was in the midst of its own merger

with the regional Bell operating company Bell Atlantic, which was subsequently renamed

Verizon Communication Inc. Following Darren’s appointment as TELUS’s president and chief

executive officer in July 2000, he established a new strategic intent for TELUS that is “To

unleash the power of the Internet to deliver the best solutions to Canadians at home, in their

workplace and on the move”

Strategic imperatives:

The strategic intent was supported by six strategic imperatives:

Build national capabilities

Provided integrated solutions

Partnering, acquiring and divesting

Focus relentlessly on data, IP, voice and wireless growth

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Value:

The TELUS team works together to deliver future friendly services and values guide the way.

Embrace change and initiate opportunity

a passion for growth

The courage to innovate

Believe in spirited teamwork

TELUS began to invest significantly in a state-of-the-art national fiber-optic IP network and in

building local access networks in the major urban areas of Ontario and Quebec.

Clear net Acquisition:

TELUS Corporation decided to expand in 2000 and decided to accelerate its national expansion

plan and exposure to high growth wireless market with 6.6 billion. That’s the reason today Clear

net is now one of Canada's foremost wireless communications providers with two national digital

networks. The MIKE network serves professional communications users while clear net PCS

provides national service to the consumer wireless phone market. On August 21st, 2000 Clear

net was sold to TELUS Corp. at an announced value of $6.6 billion, the largest

telecommunications acquisition in Canadian history. At the point of sale, Clear net had acquired

the largest block of available wireless spectrum of any wireless player in Canada and served

approximately 700,000 Canadian users.

Dividend Policy:

Dividends are the payments made by a corporation to its shareholder members. It is the portion

of corporate profits paid out to stockholders. When a corporation earns a profit/surplus, that

money can be put to two uses, first one it can either be re-invested in the business

(called retained earnings), secondly it can be distributed to shareholders. Mainly cash could be

distributed through two ways, by re-purchasing the shares from the shareholders or it could be

distributed by offering dividends. Both give a positive signal in the market and create a strong

reputation regarding the financial positions of company. So because of the good reputation most

of the investors will not willing to sell the shares so to repurchase company will increase the

price of its shares so investor sell their stick to the company.

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But these are the consequences after getting enough profit that could be sufficient for the up-

coming budget and the dividend as well. Companies have two major sources of financing –

equity financing and debt financing-in the different time periods. Both have some negatives and

positives in it. Debt financing leads toward a fixed interest rate which have to pay after a

specified period of time its drawback is the not any negligence could be made while paying it

because it increases with every extra day. On the other hand while discussing about offering

shares the company did not obliged to pay dividend until it earns any profit but it has a negative

aspect of sharing profits with the shareholders. So it could be gernalized that both have some

positives and negatives, debt have no any contribution toward the profits and it goes to end when

company pays whole payments while company could not enforce the shareholders to leave them

without it become successful in negotiating for re-purchasing the stock at a high price.

Dividend could be paid in various forms;

1. Cash: (most common) are those paid out in currency, usually via electronic funds

transfer or a printed paper check

2. New stock: By offering new stock in-return of the dividend

3. Property Dividend: those paid out in the form of assets from the issuing corporation or

another corporation, such as a subsidiary corporation. They are relatively rare and most

frequently are securities of other companies owned by the issuer, however they can take

other forms, such as products and services.

4. Other Dividends:  Financial assets with a known market value can be distributed as

dividends; warrants are sometimes distributed in this way. 

Dividend payout ratio is another important indicator:

Dividend payout ratio = Dividend per share / Earnings per share

This ratio indicates how much of the profit is distributed as dividends to shareholders. The higher

the dividend payout ratio, the more attractive the share is to the shareholders.

TELUS dividend Policy:

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A firm four key choices with regard to earnings:

Reinvest them for organic growth or acquisition

Reduce debt/increase cash

Repurchase its shares

Pay dividend to shareholders

Institutional investors, in developing their portfolio of holdings, were obliged by regulations or

by investment mandate to investing stocks that paid dividend. February 1999 merger of Telus

and BC TELECOM, annual dividends were $0.92 and $1.40 per share, respectively. To avoid

reducing dividends for BC TELECOM shareholders, the dividend was held at $1.40 per share.

The exchange ratio for BC TELECOM shareholders was 1:1

As a result, TELUS shareholders realized an 18 percent increase in dividend. With competitive

dividend relative to competitors, and an effort to position TELUS as a growth company, the

dividend had not increased subsequent to the merger.

TELUS’s investors spanned the range of institutional managers including growth funds and

dividend income funds. Individual investors and corporate investors who typically owned both

voting and nonvoting shares. At the end of June 2001, TELUS had 298.4 million common voting

and nonvoting shares outstanding.

The focus of the mutual funds was as follow:

Growth oriented: 50%

Income oriented: 36%

Balanced funds: 7%

Index funds: 7%

Dividend Reinvestment Plan (DRIP):

TELUS had a dividend reinvestment plan (DRIP), open to both Canadian and U.S. investors, that

enabled dividends to be reinvested in nonvoting shares either from treasury or from purchases in

the stock market. In 2001, in order to increase equity issuance to retire debt, TELUS changed the

DRIP program by offering shareholders an enhanced 5% discount to the existing marketing price

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for reinvested dividends and change to issuances to be solely from treasury as opposed to

secondary market purchases.

By October 2001, for four quarters, TELUS had held its dividend per share at $1.40 or $0.35 per

quarter. Many analysts covering TELUS believed that a change in dividend policy was

imminent:

Scotia Capital:

“We caution investors that we expect TELUS’s dividend will likely be cut at its next quarterly

board meeting on October 25th…..Management appears to recognize the importance of putting an

end to the uncertainty around its dividend”.

CIBC World Markets:

“We expect TELUS management to make a definitive statement about the dividend with

itsQ3/01 result on October 25th although the dividend level is ultimately a board decision”.

BMO NESBITT BURNS:

“The company maintained its current quarterly dividend policy $0.35 per share in Q2/01.while

there is no current plan to change the dividend, we believe there is good potential that the

dividend could be cut in the near future…”

The vice-president (VP) and treasurer of TELUS have been asked by the chief financial officer

for his opinion on the company's dividend policy and how many recommendations would be

conveyed to investors. In developing his response, the VP needs to consider TELUS's future

prospects, its leverage policy, the state of the telecommunications industry, and investor

expectations. This case facilitates a discussion on dividend policy. Conventional wisdom on

dividend policy can be reviewed and then interpreted in the context of the particular

circumstances facing TELUS. The case can also facilitate a short discussion on the costs and

benefits of share repurchase.

Issues in the Case:

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Case is actually relates to the dividend policy of any company. It regulates around the

circumstance which could effect of the dividends and the payout ratios. So here are also some

issues are discussed which are effecting the telecom industry in the Canada.

Financial issues:

Price regulation by Government.

Reduction in annual EBITDA of $250 M to 300 M because of CRTC role in the industry.

It is decreasing company’s share price.

Company’s debt is increasing.

Expectation of un-consistent and unstable dividend policy in the up-coming years.

Main problem which comes to the TELUS was after the acquisition of the Clearnet acquisition

posed was that it is a successful, fast moving wireless company that generated negative free cash

flow in the end of September 2000 and accordingly had never paid a dividend on its shares. As

part of the purchase consideration for the clearnet acquisition TELUS issued almost 50 million

shares I addition to issuing and assuming 4.7 billion of debt. So effectively at the prevailing

dividend payout, this meant that TELUS would be paying approximately $70 million of

incremental dividend per annum as a result of the clearnet acquisition, in addition to the interest

servicing requirement on the debt-financed portion of the acquisition price. But company is in

problem because they are thinking that promise of the consistent dividend may not be fulfilled in

the upcoming years.

Required data:

Long-term Debt = 7926.3

Short-term Debt = 1200.4

Shareholder’s Equity = 6406.8

Floatation cost = 5%

Dividend per share = 1.40

Share price = 23.65

Calculations:

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P/o ratio = Total Debt/ total Asset= 50%

Long-term Debt +Short-term Debt/ (Short-term debt + Long-term Debt + Shareholder’s Equity)

= 50%

(7926.3+1200.4) / [(1200.4 + 7926.3) + 6406.8] = 58.8%

0.50 = 9126.7 / (9126.7 + Shareholder)

9126.7 + Shareholder = 9126.7 /0.50

Shareholder = 9126.7

Change in Shareholder = 9126.7 – 6406.8

Change in Shareholder = 2719.9 Million

New dividend payout

= (Common voting or nonvoting) x (dividend per share) (reduction in negative FCF in year 2)/

common shares outstanding

15% reduction in dividend will cause a 135 million of reduction in negative free cash fallow.

= [298.4 * $1.40 – $135 / 298.4 million

= $0.94 dividend per share

New equity issue = (425.4 million – 135 million) / (1-0.05)

New equity issue = $305.6 million

Number of shares = $305.6 million / $23.65

Number of shares = 12,925,336.6 shares

TELUS in the history:

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Company has a positive image in the market due to its continuous acquisition of the large as well

as the small companies. Company acquired the fast growing and emerging Clearnet along with

other small companies.

Along with the acquisition of the new companies, TELUS also focusing on the operational

efficiency of the company through adaptation of new and emerging trends. While looking toward

the history of the company the figures and circumstances show following information.

Year Activity Amount Nature of Signal2000 Acquisition of Clear net

(Wireless company)$ 6.6 billion Positive Signal

2000 Acquire leverage 6.25 billion Negative Signal (rated in BBB)

2001 Offer unsecured notes1 9.2 billion Negative toward Risk/Positive for rating

2001 Sold large office Towers $ 310 million Negative2001 Acquire 30% QuebecTel $285 million PositiveMay 2001 Acquisition of Arqana

CommunicationPositive

June 2001 Acquisition of Daedal Ian solution

Positive

October 2001 Acquisition of PSINet Canada Positive2001 Launching OEP 198.4 million-12.5

millionPositive

It depicts that company have a positive history for the investors. There is also the dividends

consistency in the history with 1.4%/share in the back years. So investors are hopeful because

they believe that if the price goes down it will automatically come on the top because of the

continuous positive image as well as the psychological effect. But in actual it didn’t happened in

actual due to lot of acquisition it creates a negative effects in company and due to that company’s

equity ratio increases 58% from 50% and company’s start to facing problems because they have

nothing in their pockets to give dividend to its shareholders.

Historical payout ratio of the industry:

1

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BELL Canada

SBC Corp Verizon Aliant MTS TELUS0

20406080

100

120140160

180

Payout ratio

ratio

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TELUS was giving the highest payout in the past; the only mistake is the debt acquisitions which

effects negatively on the share price in the market. Company should make a strategy to increase

the equity while decreasing the ratio of debt in the capital structure.

Recommendation:

The company should not worry about a lawsuit against its lower dividend policy as the

dividend cut does not affect the majority of its investors. Upon the announcement of

dividend cut, the stock price can decrease so TELUS should use its excess cash to buy

back its stock to increase the stock price whenever it falls down.

TELUS should declare to cut dividends.

Then, TELUS should use Buy and Hold strategy to repurchase its stocks and hold them

regardless of market fluctuations. This solution as a long term investment can help

TELUS increase its stock price.

TELUS should use its excess cash to invest more in new profitable projects, acquire new

companies and profitable assets, and reinvest in financial assets.

According to our above calculation TELUS current dividend policy is not good because

1.40 dividends per share is very high according to their current situation an they are under

casted. There is negative free cash flow forecasted for TELUS (-$850.8 million and $135

million for the years 2001 and 2002 respectively) and in order to maintain the current

dividend policy, we would need to have about a $417 million dividend payable per year.

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If we were to finance this current level of a dividend we would have to raise these funds

through two options: debt and/or equity. We considered maintaining the dividend as this

would signal to investors and shareholders that TELUS is in a strong financial position

after the acquisition of Clear net; however, that is nor realty. We would have to raise

these funds through two options: Two options for raise capital: Debt and Equity. We have

these two options to raise the capital if we are going to debt financing then that is not

good because we have already issued $9.2 billion in debt, which is disaster our debt

rating is lowest investment, moody’s standard and poor’s evaluate our current debt

structure with a negative picture in credit rating.

TELUS Corporation has a policy, which does not support a lower debt rating and does

not wish to be downgraded further.

The other alternative is to issue additional equity, which could be financed with an

issuing cost of 4-6% .TELUS target net debt to capitalization ratio, is 50% and is

currently at 58.8% in 2001, this provides us with an incentive to issue more equity to

raise funds while also improving upon our target ratios. If we were to set this ratio equal

to our target of 50%, then our shareholder’s equity would have to be increased by

$2,863,052,632 after floatation costs it is going to $9,126,700,000, if we done that then

121million shares at 23.65 that would change the situation and change our negative cash

flow to positive in coming years.

According to my observation TELUS should reduce their dividend and call our

management and told our management that is our free cash and that is our dividend

policies which are not feasible according to our situation so kindly take some relevant

decisions which are aligned.