"What dividend policy would be appropriate for Telus, and what specific action should Gardner recommend at this

time?"

TELUS Corporation is one 4 major corporations in the telecommunications

industry who account for 78%Of industry revenues in 2000. TELUS corporation was
formed in 1999 with the merger of two carriers, Alberta based TELUS and BC telecom.
Following the appointment of a new CEO, TELUS created a new strategic intent for the
company. These six strategies were to build national capabilities, provide integrated
solutions, Partnering, Acquiring, Investing. Other strategies included focuses on Data, IP
and investing in internal capabilities. In pursuit of attainting these strategies TELUS
started to invest in state-of-the art national fiber optic IP network in building local access
networks. With a new strategy a Divided recommendation was to 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. When it comes to making the policies, TELUS has four key choices with
regards to earnings which included: reinvest them for organic growth or acquisition,
reduce debt/increase cash, repurchase its shares, and pay dividend to shareholders.
Maintaining the Dividend
TELUS is currently offering a dividend of $1.40, which is the second highest in
the industry. Their current expected free cash flow per share is not forecasted to be able
to maintain that dividend. With 294.4 million shares outstanding, it will cost approx.
$417,760,000 to pay the current dividend. The current free cash flow forecast is $850,800,000, leaving TELUS to finance $1,268,560,000 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. Maintaining their current
dividend would satisfy investors 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. Any additional drop in the stock price should be avoided if
possible to avoid discouraging current and potential future investors.

Stock Repurchase
Of the options available to Telus, a stock repurchase is mentioned as a means to maintain
the dividend at its current level while increasing investor confidence and still returning
capital to shareholders. As mentioned in the case, several of TELUS main competitors
had recently engaged in stock repurchases with mixed results. There is potential for many
benefits with a stock repurchase, the most superficial one being a raised EPS as a result
of the drop in number of outstanding shares in the market. That being said, there is the
aforementioned benefit of an increase in investor confidence with regards to TELUS
stock and possible future equity issues. 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 favourable for a firm to consider.
All this being said, for Telus to contemplate a stock repurchase at this time would
require the firm to raise mass amounts of capital to finance such a policy, most likely in
the form of new equity given the lower debt rating the corporation has. This raises the
logic 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.
Something else to consider is that while the historical evidence has shown that a
stock repurchase leads to higher stock valuation, in the case of Telus, a negative
signalling effect has already taken place and resulted in a drop in market share price. This
negative signalling arose likely because of the comments made by Scotia Capital, CIBC
World Markets and BMO Nesbitt-Burns and any attempt to stem the tide of negative
signalling, such as a stock repurchase, may have no effect on stock valuation in the
market.
Dividend Cut
Dividends cuts in investing can be seen as 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 conserve cash, and help stabilize the debt load
until the company is healthier. A dividend cut in the industry can be seen as a
conservation of cash which can eventually improve profits in the future which will be in
the best interests of investors. An increase in dividends is always a priority for investors
but a cut 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. It is this instability that
create a lower stock price which could bring down investor confidence in the business
and potentially decrease stock prices. The number priority of the company is too please
its owners(the stockholders) and a dividend 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.
Vice President Robert Gardner should recommend that TELUS performs a
dividend cut. There are several reasons why TELUS should reduce their current dividend
level. 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 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. Although this was a fairly large cut, 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
earnings, not as preferable as the tax free dividends they alternatively could be
receiving.

TELUS using Current Dividend Policy(No reduction/change)

Need to fund
New Shares
Funding New Share
Total Funding
Total Costs

2001
$1 268 600 000
53 640 592
$75 096 829
$1 343 696 829
$1414417715

2002
$552 800 000
23 374 207
$32 723 890
$585 523 890
$616 340 936.8

2003
$241800000
10 224 101
$14 313 741.4
$236 113 741
$269 593 411

TELUS using 10% cut in dividend

Need to fund
New Shares
Funding New Share
Total Funding
Total Costs

2001
$1 226 800 000
51 873 150
$65 360 159
$1 292 160 169
$1 360 168 598

2002
$511 000 000
21606765
$27 224 524
$538 224 524
$566 552 130

2003
$200 000 000
8456660
$10655392
$208456660
$219 428 063

TELUS using 50% cut in dividend

Need to fund
New Shares
Funding New Share
Total Funding
Total Costs

2001
$1 059 700 000
44 807 611
$22 403 806
$1 082 103 806
$1 139 056 638

2002
$343 900 000
14 541 226
$7 270 613
$351 176 613
$369 653 276.8

2003
$32 980 000
1 391 121
$2 782 242
$35 682 242
$37 560 255

TELUS using 60% cut in dividend

Need to fund
New Shares
Funding New Share
Total Funding
Total Costs

2001
$1 017 900 000
43 040 169
$60 236 236
$1 078 156 237
$1 134 901 302

2002
$302 100 000
12 773 784
$17 883 297
$319 983 297
$336 824 524

2003
-$8 900 000
-

In conclusion, TELUS best choice with regards to earnings is a dividend cut by

60%. This will ultimately lead to an increase in TELUS cash flow 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 is for
TELUS to be able to pay their dividends in 2003 without additional financing. This goal
is achieved with a dividend cut of 60%. By making this reduction, it will improve
TELUS overall financial situation.