Big telco breaks free of NBN shackles, and doles out dividends to celebrate

Over a decade ago, during the GFC, David Thodey and Catherine Livingstone put a line in the sand for investors by declaring that Telstra was a dividend company.  

Fast forward to today, and Telstra seems to have reclaimed that moniker – lifting its total dividend for the first time in seven years, to 16.5 cents per share (up 3.1%)

That’s despite a 1.3% fall in revenue, a 4.6% fall in net profit, a 5% fall in EBITDA, and a 7.7% fall in earnings per share. 

However, when picked apart, things look pretty good – so why not celebrate by returning money to shareholders! 

Telstra’s core mobile business generated income of $1.68 billion compared with $1.51 billion a year ago, while the headache of migrating customers to the NBN is almost behind it. 

For Daniel Moore from Investors Mutual Limited, Telstra and the telecommunications sector have the kind of pricing power and demand inelasticity that should see them through these challenging times in good shape. 

Telstra (ASX:TLS) KEY RESULTS

  • Revenue down 1.3% to $21.56 billion
  • EBITDA down 5% to $7.3 billion
  • Net profit down 4.6% to $1.8 billion
  • Dividend up 3.1% to 16.5 cents per share, payable September 22
  • Free cashflow up 5.9% to almost $5 billion
  • EPS down 7.7% to 14.4 cents per share

Note: This interview took place on Thursday 11th August 2022. Telstra is currently a top ten holding in the Investors Mutual Australian Share Fund.

Daniel Moore, IML

What were the key takeaways from this result? What surprised you the most?

The business has a lot of momentum. If you look now, excluding the NBN one-off payments, EBITDA has grown for three halves in a row, and Telstra has lifted the dividend for the first time in seven years. 

I think the dividend surprised people a little bit.

When you look at the key division, Mobile, they were able to grow subscribers, they were able to lift pricing, and their NPS scores were pretty strong as well, which led to quite strong EBITDA growth of 21% for Mobile. So that really drove the result.

The other positive is the cost-out. In an inflationary environment, they were able to take out $900 million of costs. There’s not too many businesses doing that at the moment. 

What was the market’s reaction to this result? Was this an overreaction, an under reaction or appropriate?

The stock’s up 1%, which I think is appropriate. It was a really solid result, perhaps marginally ahead of consensus and the outlook statement is in line with what most people expect in terms of growth for the business – mid-single digit EBITDA growth. 

Would you buy, hold or sell Telstra on the back of these results?

It’s a HOLD for us. 

We like the business. They provide an essential service, they’re the number one player in the mobile market. It’s quite a rational pricing environment at the moment, which is encouraging for the margin outlook. But this is largely reflected in the valuation. 

The share price is fairly valued. 

What’s your outlook on Telstra and its sector over FY23?

The sector as a whole should have a decent year because we’re seeing a much more rational pricing environment. All players are seeing rational prices across all books and across all customers. 

Telstra increased prices 5%, which will start from September for the majority of its customers, and we also see a recovery for Telstra and the industry in roaming revenues as international travel approaches more normal levels. For Telstra, there’s 200 mill upside in earnings from that. 

Are there any risks to this company and its sector that investors should be aware of given the current market environment?

The key risk for the sector is if the rational pricing environment deteriorates and the industry players start chasing market share again at the expense of margin. So, for Telstra in particular, as the premium mobile brand with the highest prices, there’s a bit of a risk that if there’s a downturn in the economy they lose some market share as they trade down to cheaper brands. However, Telstra mitigates this to a degree through their multi brand strategy, their key discount brand is Belong. 

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 2

We’re at the cautious end. I think valuations for many companies optically look ok, maybe a little bit expensive. But we’re cautious on the outlook for margins with rising costs. We only think the very high-quality businesses will be able to pass those costs on in full without any impact on demand for their products or services. 

We’re interested in companies that have that pricing power, and companies where demand is less likely to be impacted if these inflationary conditions exist. 

And Telstra ticks a lot of those boxes. It’s an essential service and has pricing power. 

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