When was the last time you bought auto parts for your car manufacturing facility? My guess is never. But you’ve probably entered a grocery store recently or utilized internet/TV services. When investing in consumer-oriented businesses, our personal experiences with the products and services inevitably come into play.
Customer perceptions are extremely important to the success of a franchise. However, when analyzing a business – like TELUS Corp., for example – that so many of us interact with on a regular basis, we must be careful to not let individual preferences unduly cloud our overall assessment of a franchise and investment opportunity. When cell phone, internet, TV and home security services are used by so many people, consumer complaints will certainly arise from time to time. When navigating potential personal biases, its helpful to revisit the characteristics of a high-quality franchise. As a provider of essential services in an industry with high barriers to entry, TELUS certainly checks many of the quality franchise boxes.
DIGGING A LITTLE DEEPER
We invested in TELUS Corp. within the QV Canadian Equity strategy based on factors including its disciplined management team and track record for compounding earnings. Its book value per share, or the net worth, has been growing at 6%/year for the last 15 years. If the growth continues at this rate, which we think is likely, an attractive return can be generated in combination with its attractive dividend yield of 5%.
We also look for the ability to generate continued growth in earnings. TELUS is achieving this with growth opportunities across a number of its divisions. One example is TELUS Health, which was started when the company bought Emergis in 2007. This segment has been expanded over the years to now include three areas of expertise. Babylon, which only operates in some provinces, provides physician care from a client’s phone or computer. This helps individuals that cannot find a family physician nearby. Akira, a virtual care platform offered through employer benefit plans, provides 24/7 access to medical support in areas such as mental health. Electronic medical record solutions are the third area, enabling the integration of medical records between different medical professionals. The backbone of TELUS’ high-speed internet connections facilitates the efficient operation of these business lines. All areas of TELUS Health have seen impressive growth recently, which has continued to accelerate during the pandemic.
In its home security business, TELUS acquired ADT Canada at the end of 2019, taking its home security subscribers from 100,000 to 600,000. The more services a customer has with TELUS, the more difficult it becomes to change providers. It is one thing to change cell phone providers once your plan expires, but it is entirely different when you have alarm sensors scattered throughout your house, an internet service that is up and running, and a cable TV box or two in the house. TELUS has indicated that the churn, or the number of people who leave TELUS for a competitor, moves down meaningfully when more products are added, especially security.
Another area of growth has been TELUS International (TI). TI provides customer relationship management (think call centres) and digital solutions for clients around the globe. Through this division, TELUS is able to outsource its strong customer service capabilities to third-party companies. TI was bolstered at the end of 2019 with the $1.3 billion purchase of Competence Call Centres based in Germany. On its most recent conference call, TELUS management confirmed they would like to sell partial ownership in this business in an IPO in the first half of 2021. The current revenue is estimated at $2 billion and is very profitable relative to many companies we have studied.
When we look at TELUS as an investment, although we have to pay a slight premium to other telecom companies, we are getting two additional businesses (TELUS Health and TI) that are growing at a faster rate than the traditional telecom business. Furthermore, we have seen the willingness of the board and management to crystalize some of this value within the TI division within a short period of time. TELUS’ strong execution and historical track record within highly essential service areas solidify its position as a high-quality franchise within the strategy.
