Assignment Telus Corporation: Dividend Policy

Submitted to:

Sir Asim Ilyas

Submitted by:

Muhammad Qasim

11223003

Date:
26/6/2013 Gift Business School

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 Darrens appointment as TELUSs 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

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. Thats 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. But these are the consequences after getting enough profit that could be sufficient for the upcoming 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: 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. TELUSs 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 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 TELUSs dividend will likely be cut at its ne xt 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:

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 companys share price. Companys 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 Shareholders Equity = 6406.8 Floatation cost = 5% Dividend per share = 1.40 Share price = 23.65

Calculations:
P/o ratio = Total Debt/ total Asset= 50% Long-term Debt +Short-term Debt/ (Short-term debt + Long-term Debt + Shareholders 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:

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
2000 2000 2001 2001 2001 May 2001 June 2001 October 2001 2001

Activity
Acquisition of Clear (Wireless company) Acquire leverage Offer unsecured notes1

Amount
net $ 6.6 billion 6.25 billion 9.2 billion

Nature of Signal
Positive Signal Negative Signal (rated in BBB) Negative toward Risk/Positive for rating Negative Positive Positive

Sold large office Towers $ 310 million Acquire 30% QuebecTel $285 million Acquisition of Arqana Communication Acquisition of Daedal Ian Positive solution Acquisition of PSINet Canada Positive Launching OEP 198.4 million-12.5 Positive million

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 didnt happened in actual due to lot of acquisition it creates a negative effects in company and due to that companys

equity ratio increases 58% from 50% and companys start to facing problems because they have nothing in their pockets to give dividend to its shareholders. Historical payout ratio of the industry:

Payout ratio
180 160 140 120 100 80 60 40 20 0

ratios

BELL Canada 27.9 26 18.3

SBC Corp 23.5 25.6 20.6

Verizon 29.9 20.7 11.6

Aliant

MTS 14.7

TELUS 156.3 24.1 22.6

1998 1999 2000

22.7 20.3

16 24.8

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.

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 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. 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, moodys standard and poors 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 shareholders 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.

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