Telstra faces tough call over share dividend
TELSTRA may have to rethink its capital management strategy and borrow more money if it is serious about maintaining its 22c-a-share dividend long term, an industry expert says.
David Kaynes, an analyst at investment bank Citi, says the core problem for Telstra is its earnings are on a downward spiral because of intense competition in the fixed and mobile broadband market. Telstra chief Andrew Penn in recent months has unveiled an aggressive plan to cut costs over coming years and separate its mobile business and its fibre infrastructure business, dubbed InfraCo.
In a report for investors, Mr Kaynes said he believed the company would generate insufficient cash flow to hold its total annual dividend payouts at 22c a share in the long term.
However, one move Telstra could make to hold the line on dividends a little longer was to modify its capital management framework, he said.
According to the Citi report, the telco will need to cut about $2.5 billion from its debt by June 2022 to meet its stated target.
“If Telstra were to change its capital management framework, allow higher gearing on InfraCo and borrow to pay the dividend, this would let it fund a 22 (cents per share) dividend for a few years more,” Mr Kaynes said. “In our view, this would only be a temporary reprieve unless it can increase earnings.”
Citi has valued the InfraCo business at $21 billion, with Telstra forecasting long-term earnings from the unit to settle at around $2 billion a year.
Half of that is expected to come from the payments Telstra receives from the company rolling out the national broadband network, NBN Co, for handing over infrastructure it previously used. The rest is expected to come from supporting its core mobile business.
While Telstra has leveraged its fixed infrastructure in the past to act as the monopoly provider of wholesale broadband network, that position is now untenable as the NBN is rolled out.
Meanwhile, conditions on the mobile front might worsen with Telstra’s prices, according to Mr Kaynes, still too high.