Telstra shares have slumped after the telco slashed its dividend outlook and reported a 33 per cent dive in full-year profit to $3.9 billion.
The result was down from last year’s $5.8 billion profit, but still roughly in line with expectations after the sale of Telstra’s $1.8 billion stake in its Chinese Autohome venture.
Telstra announced it would pay a full-year dividend of 31 cents per share this year, which was below market expectations.
However, the future looks a lot bleaker for investors’ cherished dividends.
Telstra said it would cut next year’s full-year payout by 30 per cent to just 22 cents per share.
NBN pressure forces rethink
The change in policy follows a nine-month review of the company’s cash position as it faces the NBN’s rapid erosion of its traditional fixed-line phone and internet businesses.
Telstra chief executive Andy Penn said, given the price NBN charges telcos is likely to double in coming years, the impact on earnings would be $3 billion a year — out towards Telstra’s glummest forecast.
Against this, Telstra receives two income streams from NBN — ongoing receipts for use of existing infrastructure, which will eventually grow to $1 billion per year, and a $9 billion payment spread over several years as compensation for Telstra giving up its traditional wholesale business.
Mr Penn said, given the challenges Telstra faced, dividends would be cut from the current policy of paying out almost 100 per cent of underlying earnings to a range of 70 to 90 per cent.
This year’s dividend represented a 99 per cent payout.
“We do not underestimate the impact on shareholders, which is why we are providing advanced guidance,” Mr Penn told an investor briefing.
“It is about setting the business up for the future and giving us the flexibility to invest and grow the business.”
Future dividends will be propped up by plans to sell forthcoming NBN receipts.
Mr Penn said the plan, which requires approval from the NBN, Federal Government and investors, is to sell 40 per cent of long-term recurring NBN receipts, netting up $5.5 billion.
“Our intention would be to use the proceeds to reduce debt by around $1 billion, with the balance to support a capital management program to enhance shareholder returns, most likely through a series of on-and-off-market buy-backs.”
Newstreet analyst Ian Martin said it seems management has capitulated on dividends, given the price NBN charges telcos has been relatively flat.
“The CVC price [the fee NBN charges service providers] has been flat for the past couple of years, even a 50 per cent increase seems like an uncertain assumption to base a big change on the capital base,” Mr Martin observed.
Citi’s David Kaynes said ordinary dividends — excluding the “special” NBN-based payouts — are likely to continue declining through to 2021 as underlying earnings fall further during the remainder of the NBN rollout.
“Shareholders will need to adjust to the new dividend and capital policies and, in our view, yield-focused investors are likely to be disappointed with the new trajectory for dividends,” Mr Kaynes argued.
However, Mr Kaynes said the action was necessary.
“In our view Telstra has made a positive move in rebasing the payout and allowing more capital to reinvest into its core business,” he wrote in a note to clients.
The immediate impact from investors was unforgiving, with shares tumbling more than 10 per cent on opening to a five-year low of $3.81 a share, before a slight recovery to $3.97 by 12:22pm (AEST).
Performance ‘in-line’ with expectations
Mr Penn described the result as a strong performance that delivered against the company’s guidance.
Underlying earnings — stripping out one-off items — grew 1 per cent to $3.9 billion, while revenue was up 4 per cent to $28.2 billion.
The fixed-line business continued its long-term decline, with earnings down another 5 per cent, while mobile earnings edged up 0.8 per cent.
The big gains were made in Network Application Services — which includes management services such as cybersecurity and “cloud” systems — with earnings up more than 30 per cent to $3.4 billion.
The media business, including Telstra’s stake in Foxtel, grew by 8 per cent to $935 million.
The biggest impact on the result, though, was the growing importance of NBN on the telecommunications landscape.
Telstra’s NBN income grew by almost 90 per cent to $2.5 billion.
Morgan Stanley’s Andrew McLeod said the result was largely in-line with expectations, but the weaker outlook and dividend cut will likely weigh negatively on Telstra shares.
Mr McLeod maintained his “underweight” stance on the stock and a 12-month target price of $4 a share.