Telstra Dials Back Dividend Policy

By Glenn Dyer | More Articles by Glenn Dyer

While Telstra executives defended the decision to cut the telco’s dividends yesterday – more than 180 million with a value of close to $700 million were sold – investors were selling the shares by the millions, pushing the shares to five year lows.

The decision, which had been expected (and will be applauded by the investment analyst class) overshadowed the telco’s 2016-17 results. The shares plunged from $4.33 to a low of $3.81 in five minutes of trading yesterday, wiping more than $5 billion off the value. They ended down 10% at $3.87.

The argument from executives and the company is that the big dividends had to go to protect the company’s future, so go they will.

The 2016-17 year will be the last of the 15.5 cents a share per half year (or 31 cents for a full year).

The total from 2017-18 will be 22 cents a share and the shares are being re-priced on that basis. And no doubt there are further falls in store.

The move ends the current practice of paying out almost all underlying profit to its 1.4 million shareholders, to paying between 70% and 90% of underlying profit.

That’s a ratio chief executive Andrew Penn says is “more in line with global peers and local large companies.”

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.

Mr 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, which would eat up much of this year’s profit.

Offsetting this Telstra receives two income streams from NBN (which is facing its own problems) — ongoing receipts for use of existing infrastructure, which will eventually grow to $1 billion a year, and a $9 billion payment spread over several years as compensation for Telstra giving up its traditional wholesale business.

Telstra aims to use revenues from the latter to soften the blow to shareholders from the dividend cut.

While that might help the billions lost yesterday are merely more billions that have been wiped from the Telstra share price since Mr Penn became CEO in May 2015.

Media commentary reckons upwards of $28 billion has disappeared from the value of shareholders’ Telstra holdings and the only thing keeping them in the share register was the big dividend.

"We realise this is a material reduction from the historic level of our dividend and we do not underestimate the impact on our shareholders," Penn said. "This is about setting the business up for success in the future."

He said Telstra’s board had not taken the resetting of its dividend policy lightly, and was seeking to balance returns to shareholders with the long-term strategy and sustainability of the company.

“In addition to the ordinary dividend, we intend to return in the order of 75 per cent of net one-off NBN receipts to shareholders over time via fully-franked special dividends," Mr Penn said.

“We believe this is appropriate given one-off income is akin to compensation for an asset sale over a number of years and aligns with market feedback and expectations that these receipts are returned to shareholders."

That suggests there will be a couple of years where total dividends might keep pace with the 31 cents a share payout.

Chief financial officer Warwick Bray said the change will support a strong balance sheet and offer flexibility during an uncertain period of digital disruption, increasing competition and the transition to the national broadband network.

"Our world is changing," he said."Technology innovation is accelerating, we’re seeing new competitors."The business needs to transform, and our dividend policy needs to match.

The announcement came as Telstra’s full-year statutory profit in the year to June slumped by about a third to $3.9 billion, primarily due to a $1.8 billion windfall gain from the sale of Chinese car web site Autohome in the 2015-16 year.

Without the Autohome sale, profit comparable earnings were up 1.1% at $3.87 billion on a 2.7% dip in revenue softened to $26 billion.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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