Say What Wednesdays
Why has Telstra tanked? Is it a good time to buy, or sell?
Why has Telstra tanked?
For so long, Telstra has been a Market Darling … a great dividend-paying share, almost like the world’s best term deposit…but what has happened? They are out of favour with investors for the past 3 (or so) years…
What has gone wrong:
- Telstra has warned investors to brace for a profit level at the lower end of its guidance range, but remains committed to a 22-cent total dividend payment.
- Telstra has blamed “challenging trading conditions” for a pre-tax and interest profit that is now expected to come in at the bottom end of a previously stated $10.1-$10.6 billion range.
CEOs and price – History:
- Ziggy Switkowski – 1999 to 2004 – Oversaw the transition from government sector to privately owned, started in 1997. Went from $9 to $5.
- Sol Trujilo – 1/7/05
- Went from $5 to $3.5 in his first year
- Back to $4.8 the next year, then down to $4.2 the next year
- Just before he left – $3
- David Thoedy – May 2009
- From a price of $3, it went to around $2.50 18 months later (at a low), but from there it rose to $6.50 at the start of 2015 – 5 years of positive gains
- Andy Penn – April 2015
- Dropped from $6.60 to $2.70
- 2016 Aug – momentum has been on the oversold side
- Competition – last 12 months alone – facing a fourth network operator entrant in mobile, an increasing number of MVNOs [mobile virtual network operators — basically companies that provide services through another telco’s network]
- NBN – The Delays are having a negative effect on expected earnings
- Aggressively cut costs, with “core fixed costs” expected to decline around 7 per cent this financial year, with about $300 million in restructuring costs.
- Telstra is ramping up its capital spending on new technology, especially its 5G mobile rollout – 2016 – Announced $3bn in capex (capital expenditure)
- Fines – $10m of fines, but that is nothing
- Outages – Few outages nationally in the past few months
Financial metrics were near the bottom end of targets
- Revenue expected to be around the middle of the $27.6-$29.5 billion range
- Free cash flow near the top, or even above, its $4.2-4.7 billion guidance.
- Big one: The decrease of dividends
- Raised Dividends, then cut by 30%!
- Earnings per share (EPS): Average about 32c per share for 10 years
- 2018: 29.3 EPS, 22 dividends per share (DPS) – 75% dividend payout ratio (DPR)
- 2019 – 27.5 EPS, 18.3 DPS – 66% DPR
- 2020 – 25 EPS, 22 DPS – 88% DPR
- History has been about 90% DPR
- Price/earnings ratio (PE ratio) – 8.99
– But what is the future earnings versus current prices?
- 2019 – 9.8 PE
- 2020 – 10.8 PE
- Yield – 10.1% plus FCs
- Income Coverage 8.96, Debt/Equity – 118.9%
- Financials – We are back to revenues of 2011
How much of the price is moved by fundamentals – very little! It’s really our response to the drop in dividend payments which has created such a massive decline in the price itself.
- Telstra are in and out of favour with the market
- Is it overhyped?
- They need to turn themselves around in terms of management decisions go, because their success lays in what they are spending the capital expenditure on
- They are a decent term deposit – Though the price could go down more
- Will it ever grow again?
- Competition – Telstra still have a pretty decent market share and are semi protected through regulations