How slashed Telstra dividend affects our outlook

Glenn Freeman | 23/08/2017

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Brian Han: The fiscal 2017 result was actually in-line with our expectations. But that was a complete sideshow to the 29 per cent cut to forward dividend estimates by the company and the magnitude and the abruptness with which the cut was announced came as a real surprise to us.

We were previously expecting Telstra to gradually ease its dividends over the next few years to about $0.25 per share by the end of fiscal 2021. Telstra bit the bullet and cut it straightaway to $0.22 per share from next year. So, that was a real surprise. And furthermore, we thought it was quite conservative the quid pro quo that Telstra is planning to give shareholders in return for the dramatic dividend cut.

For instance, it plans to return only 75 per cent of the one-off NBN receipts that are coming to Telstra over the next few years. And also, it plans to only monetise 40 per cent of the recurring NBN receipts that Telstra is going to receive over the next few years.

Now, with a strong balance sheet and still pretty strong cash flow, we would have thought that could return much more of those NBN receipts back to shareholders. Obviously, our dividend forecasts have been cut and also our fair value estimate has been reduced by about 4 per cent to $4.60 per share. Shares are still trading at a pretty good 14 per cent discount to our fair value estimate.

And yes, we still remain relatively positive on Telstra as shown by their 14 per cent discount to our intrinsic assessment and we still believe management is on the right course to address their $3 billion NBN-inflicted hole in its earnings. And also, even at $0.22 per share on current stock price that equates to about 5 per cent, 5.5 per cent fully franked dividend yield. So, we think that's a good starting point for shareholders.

This report appeared on 2017 Morningstar Australasia Pty Limited

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