Dividends Promise Fails To Connect
Sun Herald
Sunday June 27, 2004
TELSTRA's promise of higher dividends and another share buyback has left stockbrokers underwhelmed, with its share price likely to be stuck around $5.
Although that leaves investors who bought the original T1 and T2 35 cents behind on their average investment price, it could pay to hang in there.Brokers speculate Telstra will pay a 28 to 30 cent dividend in the new financial year, and say that at least one share buyback is likely.That would give a yield of 5.6 per cent, plus the 30 per cent tax break from dividend franking.The history of buybacks is that shareholders who hold on do well, despite the lucrative tax breaks usually offered to those who sell.But the biggest winners are often those who sell for the tax breaks, then immediately buy the stock back.It takes an unusually good punt with the proceeds of a buyback to finish up ahead of shareholders who hang on.Even so, brokers say the share price is going nowhere in a hurry.And Telstra's longer-term prospects don't appear to be bright.Telstra chief executive Ziggy Switkowski last week vowed to pay out 80 per cent of Telstra's profit in dividends, effectively ruling out any more grand spending schemes.Last year, the payout was 70 per cent.The company will give shareholders $4.5 billion over the next three years.Telstra's foray into Asia has been a disaster, while the latest idea, a tilt at The Sun-Herald's publisher, John Fairfax Holdings, was considered hare-brained by brokers and nobbled by its divided board, apparently prompting the subsequent resignation of chairman Bob Mansfield.It recently bought the Trading Post instead, planning to link it to the Yellow and White Pages' goldmine.There is speculation that Switkowski, who oversaw the billion-dollar Asian fiasco and allowed Telstra's dominance in mobile phones to be wiped out, will be the next to depart.But his deft fleecing of the banks, which will get back only 26 cents in the dollar of the $US1.2 billion ($1.7 billion) they lent the Reach joint venture in Hong Kong, has been well received. Reach, on which Telstra has so far lost $1.2 billion, is on the verge of breaking even.Telstra's recent jacking up of home line rentals is estimated to yield enough in 2004-05 for it to lift its dividend from 26 to 30 cents.Even so, it faces huge longer-term problems, not the least of which is a likely decline in home lines as broadband internet takes hold, not to mention the cut-throat competition among mobile phone companies, especially Optus.While broadband is finally taking off, Telstra's problem is that the prices for it are falling.It also has to face replacing its expensive, antiquated copper wire network with fibre optics.One bright spot for Telstra is its 50 per cent ownership of the pay TV operator Foxtel and, even better, ownership of the cable it uses. Even then, there is pressure from the Australian Competition and Consumer Commission for it to divest its interest in Foxtel, which would be a huge free kick to co-owners Kerry Packer and Rupert Murdoch.Analysts are concerned that there is nowhere for Teltra to grow its revenue, while it will remain capital hungry, exacerbated by returning money to shareholders.Even its concerted, and apparently successful, push into broadband is being constrained by tough competition and falling prices.Wireless is also threatening to spoil the party."By the end of August the whole of Sydney will be able to take wireless internet," says one broker. This will make free phone calls over the internet even more accessible.CROSSED LINESBROKER TIPS* Ord Minnett: $5.16* Patersons: $5* UBS: $5.45* Goldman Sachs JBWere: $5.28THE BULLISH VIEW* Fleeced the banks in getting rid of joint venture Reach's massive debt* Big cash generator* Promise of higher dividends, share buybacks* Has box seat at Foxtel* Uptake of broadband* Owns Yellow and White PagesTHE BEARISH VIEW* Losing market share in mobiles, broadband and fixed lines* Copper wire network needs to be converted to fibre optics* Divided board, unimpressive chief executive* Constrained by 51 per cent Government ownership* Not popular with ACCC which wants it to quit Foxtel* Broadband, mobile phone prices dropping, making highly profitable fixed line phone redundant
© 2004 Sun Herald
