OUTLINE

The Vice President (VP) Robert Gardner 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.
INTRODUCTION
TELUS Corporation is one of major company in telecommunication industry who account for
78% of industry revenues in 2000. TELUS Corporation was a merger of two carriers; Alberta
based TELUS and BC telecom. With the appointment of new CEO, TELUS created a new
strategic intent for the company. With a new strategy a Dividend recommendation was made in
the coming weeks to decide a new policy. The dividend policy is formed by future prospects,
leverage policy, the state of the art telecommunications industry, and the expectations of
investors.
In October 2000 TELUS acquired Clearnet Communications Incorporation (a successful wireless
firm) for $6.6 billion (enterprise value). The acquisition was financed from a short-term bridging
loan of $6.25 billion from a consortium of Canadian and international banks. Due to this the
companys leverage increased. As a result the rating services downgraded TELUSs debt rating.
In 2001, TELUS was successful in getting unsecured notes and bank-syndicated credit facilities
of $9.2 billion. Due to this the short-term bridging loan was eliminated. To improve the balance
sheet of the company, TELUS divested its directories business for $810 million and sold and
leased back its office towers $310 million. TELUS also purchased Quebec Tel by acquiring its
remaining 30 per cent shares.

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Anam Munir

The company also took steps to improve the performance within the company. To improve the
operational efficiency, Telus started an Operational Efficiency Program (OEP). Because of this,
the company had to record a non-cash restructuring charge of $198.4 million.
PROBLEM STATEMENT AND ANALYSIS
The major problem was that weather to cut of dividends or maintain its current payout level. For
this problem TELUS has four key choices with regards to free cash flows (FCF) which included:
reinvest them for organic growth or acquisition, reduce debt/increase cash, repurchase its shares,
and pay dividend to shareholders.
For this the TELUS have the following option in order to avoid the negative impact on the
company image;

Pay current Dividend

TELUS is currently paying a dividend of $1.40 to its shareholders. Their current expected
negative free cash flow per share is not being able to maintain that dividend. With 298.4
million shares outstanding, it will cost approx. $417.76 million to pay the current
dividend. The current free cash flow forecast is negative ($850.8) millions, leaving
TELUS to finance $1,268.56 million ($417.76+$850.8) to maintain the dividend of
$1.40. To avoid additional debt and for TELUS to maintain their current level of dividend
payouts, they would need to raise capital through equity. The current dividend payout
would satisfy the Shareholders who have invested in TELUS with expectations of
receiving a high dividend. However, for TELUS to raise the capital needed it will have to
do so by issuing new shares, issuing new shares of course will cause the share price of
TELUS to decrease. The TELUS stock has dropped from $42.65 down to $23.65 from
January to October in 2001. TELUS should stop any additional drop in share price in
order to avoid discouraging current and potential future investors.

Repurchase of Share from market

Another option available to TELUS, the repurchase its stock in order to maintain the
dividend at its current level while increasing investor confidence and still returning
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capital to shareholders. As mentioned in the case, several of TELUS main competitors

had recently engaged in stock repurchases with mixed results. There is a potential for
stock repurchase, the most apparent one is that the EPS rose as a result of the decrease in
number of shares outstanding. Historical evidence indicated that a stock repurchase often
results in higher stock valuation and further down the road, an increase in shareholder
returns, something very favorable for a firm to consider.
The drawback of this option, the company requires a huge amount of capital in order to
repurchase of its share, most likely in the form of new equity given the lower debt rating
the corporation has. This will create the problem of issuing stocks for the purpose of
buying them back, two events that offset each other and would seem to have no positive
or negative result.
Historical evidence has shown that a stock repurchase leads to higher stock valuation but
in case of TELUS a negative signaling effect has already hit the company share price and
dropped it.

Cut the Dividend from current level

A cut of Dividend has both good and bad events in the telecommunications industry. It
can be seen as not a bad event because it shows the company is taking the necessary steps
to save cash, and help stabilize the debt load until the company is healthier. An increase
in dividends is always a priority for investors but cut in dividends can show a sign of
weakness and that the company does not have a hold on its current situation and that this
may show instability. The priority of the company is to please its owners (the
stockholders) and a dividend cut could be taken as a weakness in the company. In certain
circumstances a dividend cut for a short period of quarters can be seen as a transitional
phase and the investors will see the cut as important for making a higher dividend in the
future. A dividend cut can dramatically lower the stock price and continuation of a
dividend cut could possibly lead to the stock price be worth nothing.
The decision for TELUS is to how much dividend should be cut down in order to make a
growth a show a positive impact on company policy of dividend cut. The following are
the options available in order to cut the dividend;

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TELUS Current Dividend Policy (No reduction/change)

Dividend payout (1.4*298.4 = $417.76 milion)

Need to fund

New Shares

2001

2002

2003

417.76-(-850.8) =

417.76-(-135) =

417.76-176 =

$1 268.56 million

$552.76 million

$241.76 million

$1 268.56/23.65

$552.76/23.65

$241.76/23.65

= 53.639 million

= 23.37 million

= 10.224 million

1.416*53.639

1.416*23.37

1.41*10.224

= $75.096 million

= $33.09 million

= $14.4 million

$1 343.65 million

$585.85 million

$256.16 million

Flotation Cost

Total Funding

If TELUS cut dividend by 20%

Dividend payout (1.4*.8*298.4 = $334.21 million)

Need to fund

2001

2002

2003

$334.21- (-850.8)

$334.21- (-135)

$334.21- 176

= $1185.01 million
New Shares

1185.01/23.65
= 50.11 million

Flotation Cost

50.11*1.416
=$70.955 million

Total Funding

$1256 million

= $469.21 million

= $158.21 million

19.84 million

6.7 million

$28.1 million

$9.49 million

$497.31 million

$167.7 million

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If TELUS cut dividend by 50%

Dividend payout (1.4*.5*298.4 = $208.88 million)

Need to fund

New Shares

2001

2002

2003

208.88+850.8

208.88+135

208.88-176

= $1 059.68 million

=$343.88 million

=$32.88 million

14.54 million

1.3903 million

$20.50 million

$1.96 million

$364.38 million

$34.84 million

2001

2002

2003

167.104+850.8

167.104+135

176.104 - 176

= $1 017.9 million

= $302.1 million

= ($8.89) million

1017.9/23.65

302.1/23.65

= 43.04016 million

=12.7737 million

43.04016*1.416

12.7737*1.416

= $60.9448 million

= $18.087 million

$1078.8448 milion

$320.1875 million

1059.65/23.68
= 44.806 million

Flotation Cost

1.41*44.806
= $63.1 million

Total Funding

$1122.78 million

If TELUS cut dividend by 60%

Dividend payout (1.4*.4*298.4 = $167.104)

Need to fund

New Shares

Funding New Share

Total Funding

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DECISION
In the above mentioned options the best option for Robert Gardner should recommend that
TELUS Corporation follow a dividend cut. There are many reasons for choosing this option.
The reasons are;

One leading telecommunications analyst believed that after the dividend cut caused stock
to weaken initially, it would ultimately eliminate shareholders uncertainty on the future
of TELUS dividend and stock would rebound as TELUS positioned itself as a growth
company.

Another reason is that a company in the industry was forced to make a dividend cut as
well. AT&T reduced its quarterly dividend 83% from $0.22 to $0.0375. This dividend cut
saved AT&T $2.8 billion annually and helped to reduced AT&Ts $62 billion dollar debt
account.

Merrill Lynch published a research note that stated the dividend cut was a sensible means
of creating needed cash flow instead of just fudging their increasing revenue and
margin pressures. However, for TELUS to cut its dividend could send a signal of
financial weakness and cause investors interested in high yield stock to sell immediately.
But as Merrill Lynch reported, investors could potentially see the dividend cut as a
practical way to increase TELUS cash flow.

When looking at dividend payout options, it is important to consider who your largest investor is
and also how your choices will directly affect your largest investors. For TELUS the largest
investor is Verizon Communications Inc. Verizon currently owns approximately 65.595 million
shares of TELUS, which makes up approximately 22% of all shares outstanding. Being a
corporate investor, Verizon is not taxed on dividends received, whereas they are taxed on 50% of
income on capital gains. Verizon obviously therefore will be much more satisfied with a
dividend, even after a dividend cut, as compared to a stock repurchase. A stock repurchase would
increase the value of the stock, but if Verizon were to sell their stocks they would be taxed on
50% of that earning, not as preferable as the tax free dividends they alternatively could be
receiving.

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RECOMENDATION
According to analysis, the best choice for TELUS regarding free cash flows is to cut dividend by
60%. This will ultimately lead to an increase in TELUS cash flow and make it possible to mak
growth with minimal damage on the companies perceived image. A dividend cut will be seen as
a sensible way for TELUS to manage its growth and to increase future stock price. The ultimate
goal for TELUS is to be able to pay their dividends in 2003 without additional financing by
issuing shares. This goal is achieved when TELUS cut dividend by approximately 60%. By
implementing this dividend cut strategy, TELUS will improve its overall financial situation.

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