Two things about Telstra from this week’s interviews.
1. Bill Morrow of NBN Co told me he thought 100 resellers of the NBN is unsustainable and is likely to come down to 4-5, and also that the NBN itself will never make more than 3.5% return.
2. Andy Penn of Telstra told me yesterday that lower margins from the NBN will cost the company $3 billion, that he’s only made up about $2 billion of that so far and doesn’t know where the rest is coming from.
In other words, no one is going to make any money out of the NBN. You might think that’s great, since it should mean that customers are getting a good deal, except they’re not. The speeds are slow, the service is poor and the prices are high.
This is all locked in now. Nothing good will happen unless the Government writes down its investment in the network or allows negative returns, so the company can charge lower prices, and make it one (fast) speed for all. Neither of those things is likely to happen.
As for Telstra, nothing good is going to happen at all. As I wrote on The Constant Investor six weeks ago:
“…the bloodbath has only just begun, in my view, especially for Telstra. I suspect it will be far worse for TLS than anyone currently thinks and the challengers will also lose vast fortunes trying to plunder it.
“TLS will have to cut its dividend to try to hold market share, and they will all fight like gladiators in a Roman arena. Some will die; all will be horribly injured.”
TLS has indeed now cut its dividend and is targeting the payout ratio rather than the amount – which used to be 28c. It rose to 31c and is now 22c.
It will definitely end up lower than that because it is being supported by temporary payments from NBN Co for the transfer of wholesale customers. The deal is for $11 billion in payments, which will progressively reduce and finish in about eight years.
Delian Entchev of Watermark Funds Management told the Financial Review this week he had worked out that the dividend could go as low as 17c, using the new 80% payout ratio policy.
At $4 Telstra is yielding 5.5%, based on next year’s 22c dividend. To maintain that yield on a 17c dividend, the price would have to fall to $3.
That’s what will happen unless Andy Penn can pull a growth rabbit out of his hat. He hasn’t got one at the moment, but he’s working on it.
Interestingly, as you’ll see in my interview with him, Andy Penn referred to Telstra as a technology company, so that’s presumably where he sees the growth potential coming from.
The trouble is that the firms he is competing with (read: Amazon, Google, Apple, Alibaba) don’t pay dividends, and certainly not 80% of profit.
When the GFC hit, David Thodey and Catherine Livingstone boldly declared that Telstra was an income investment and guaranteed the dividend, paying out 100%, and more, of profit.
With the benefit of hindsight that was a terrible mistake. They should have doubled down and invested in the business; an income stock cannot also be a technology stock, at least not for a while.