In its annual general meeting, Telstra (ASX: TLS) highlighted about the numerous challenges that the group has witnessed in FY17 including intense competition in both the fixed and mobile marketplaces while change in technology and connectivity, growth in capacity demand, and acceleration in the rollout of the NBN, have weighed on the stock heavily. Further, entry of the fourth mobile network operator into the Australian market with TPG coming in has become another challenge. This has led the telecom player announce for a change to its dividend policy entailing a pay out between 70% and 90% of earnings from fiscal 2018 instead of close to 100%. In FY17, the group had announced for a total dividend of 31 cents per share including a fully franked final dividend of 15.5 cents per share. This coupled with $1.5 billion on market and off market share buy-backs led the shareholder returns to be $5.2 billion in the 2017 financial year.
The change in Telstra’s dividend policy from paying all profits out as dividends, which is one change among many, has mounted up some pressure but the company aims to maintain or increase the total dividend over time with growth in earnings. At the moment, slashing of dividends with one-off impact of the national broadband network (NBN) seems to be playing on the minds of the shareholders. TLS has highlighted that NBN is expected to have around a $3 billion negative impact on the earnings on full roll out. On the other hand, Telstra intends to return about 75% of net one-off NBN receipts over time through special dividends to the shareholders. The group now expects to pay a total dividend of 22 cents per share, fully franked, in FY18.
Capital Management Framework (Source: Company Reports)
Looking at the past performance, TLS’ total revenue for FY17 surged by 4.3% on a reported basis from continuing operations to $28.2 billion while EBITDA was up 2% to $10.7 billion. The group also added 218,000 new retail mobile services and 132,000 new retail broadband services, while 676,000 new NBN connections were achieved. The group lowered its underlying fixed costs by $244 million and its target to achieve at least $1.5 billion of productivity savings by FY22 seems to be tracking well. The group aims to keep on delivering value through better customer experiences, growth from core business; and building new growth businesses close to the core. TLS continues to find support from management team’s strength, its ability to deliver healthy earnings, strong market share, position as the largest reseller of the NBN and productivity programs.
Amidst the challenging and highly competitive environment, TLS stock has plunged 15.8% in the last three months (as at October 16, 2017). On the other hand, stocks of competitors, TPG Telecom Ltd and Vocus Group Ltd surged 5% and 10.2%, respectively, on October 17, 2017 while TLS’ chairman addressed the shareholders at its Annual general meeting.
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