q & a
questions & answers
Given debt repayments made in recent years, might TELUS become under-leveraged? What are your plans for the significant free cash flow expected in 2006?
To ensure that TELUS’ balance sheet reflects an optimal financial structure, a moderate level of debt is necessary to maintain a low cost of capital. With this in mind, our Board of Directors has established long-term leverage policy targets for the net debt to EBITDA ratio in the range of 1.5 to 2.0 and net debt to total capitalization of 45 to 50%.
We have continued to fulfill our commitment to act in a manner that balances the interests of equity and debt holders. In recent years, this was best accomplished by an orderly reduction of debt to attain more modest leverage levels. This period has been characterized by strong performance by both TELUS share and debt prices, reflecting the effectiveness of our approach. More recently in 2005, we notably retired early $1.6 billion of debt. This action is expected to generate a positive economic return to TELUS by reducing interest expense in the future and contributing to a reduction in our gross debt leverage ratios. By year-end 2005, we reported a net debt to EBITDA ratio of 1.7 and achieved our policy target range. This resulted in upgrades from all four major credit rating agencies during 2005.
Maintaining a balance between shareholder and debt holder interests in the future remains a priority for TELUS. Having achieved our long-term leverage targets, we expect to refinance our future debt maturities through the issuance of additional notes, commercial paper or other such instruments. Surplus cash flow can then be returned to shareholders.
In 2006, TELUS expects to continue to utilize a significant portion of its expected $1.55 billion to $1.65 billion of free cash flow to pursue further return of capital to shareholders through dividends and share repurchases.
Following a 33% dividend increase for 2005, TELUS announced a substantial 37.5% increase to the quarterly dividend effective January 1, 2006. TELUS now pays a quarterly dividend of 27.5 cents per share.
Our current implied forward dividend payout ratio, based on 2006 targeted earnings per share, is 42 to 46%, which is at the low end of the range of our dividend policy guideline of 45 to 55% of sustainable net earnings. This indicates that, if TELUS continues to be successful in growing earnings as planned, there would be an opportunity for the Board to consider, in the future, further increases in the dividend.
TELUS also continues to return capital to shareholders through share repurchase programs. TELUS has repurchased 23 million shares for $970 million since December 2004 under two Normal Course Issuer Bids. We are currently in the midst of a second repurchase program for up to 24 million shares, or 7% of outstanding shares, for a 12-month period ending in December 2006. We believe that share repurchases constitute an attractive investment opportunity that should enhance the value of the remaining shares.
By achieving our 2006 free cash flow target of $1.55 billion to $1.65 billion, TELUS should be well positioned to operate within our long-term leverage policy targets and continue to pursue future opportunities to enhance shareholder value.
Robert McFarlane
Executive Vice-President
and Chief Financial Officer
Member of the TELUS Team