Telstra Defends Dividend Policy, Tougher Times Ahead

By Glenn Dyer | More Articles by Glenn Dyer

No real reaction from the Telstra share price from yesterday’s handwringing by the company’s chairman John Mullen about the dividend cut.

In fact it was what you would have expected from a chair and CEO of a company under self-inflicted (in the eyes of many shareholders) pressure.

Mr Mullen told the AGM yesterday that the dividend cut was tough on shareholders but he expects the company to maintain or increase the total dividend over time as earnings grow.

He also warned shareholders that there is no easy fix to tackling the impact of the National Broadband Network on Telstra’s books.

“I have had shareholders ask why we can’t just go out and find growth businesses to replace the $3 billion in earnings that we are losing because of the NBN, so we can maintain the dividend at previous levels … that is very easy to say and very hard to do,” Mr Mullen told the AGM.

“To expect that we can suddenly just go out and create another $3bn EBITDA business overnight is simply just not realistic.”

Mr Mullen said the recent change to Telstra’s dividend policy is just one of many difficult decisions the telco needs to take to remain relevant.

“Changing our dividend policy is just one change among the many that we will need to make,” Mr Mullen told shareholders.

“Whether we like it or not, we have to accept that the world around us has changed dramatically and Telstra is having to change just as dramatically as well.”

Telstra is cutting its overall dividend for next year by 30% to 22 cents a share as part of its overall transformation strategy.

The telco reported a reduced full-year profit in 2016-17 of $3.89 billion compared to $5.85 billion the year before. Net profit after tax from continuing and discontinuing operations slumped 33.8% to $3.9 billion. Revenue for the year was 2.7% lower at $26.01 billion down from $26.74 billion in 2015-16.

The telco’s shares have been hovering near five-year lows price and are yet to recover from the dividend cuts and lingering fears about the road ahead for Telstra. They rose then fell to remain unchanged at the close on $3.50 yesterday.

Mr Mullen reiterated that Telstra can’t buy its way out of its current predicament.

“This would be very expensive, could take us away from our core competencies into whole new areas of risk, and could jeopardise the strength of our balance sheet.”

Instead Mr Mullen told the meeting that new growth will have to come from building bespoke technology businesses connected to Telstra’s core network and continuing to improve customer experience.

“This may sound a bit boring but it is not – it is prudent, well thought through and best leverages our strengths.”

With the local telecom industry undergoing a structural shift thanks to the NBN, Mr Mullen said shareholders needed to understand the extent of the hit Telstra will take from the project.

The NBN is expected to have around a $3 billion negative impact on Telstra’s earnings and Mr Mullen said that the earnings loss was more than what most ASX companies would need a decade to achieve.

“To put that number into context, that is equivalent to the annual earnings of a major company the size of an Origin Energy, or a CSL, or even a Qantas,” he said.

“It can take decades to build a business that size – but we don’t have decades.”

And CEO Andrew Penn told shareholders that the operating environment for telcos was challenging, with increased competition, digital disruption and the migration to the NBN to be dealt with over the next two to three years.

Telstra has confirmed its guidance for 2017-18, saying it expects revenue in the range of $28.3 billion to $30.2 billion and earnings before interest, tax, depreciation and amortisation of $10.7 billion to $11.2 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.

View more articles by Glenn Dyer →