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Established Telstra farming out profits as dividends

27 Sep 2021 7 month(s) ago

Australia's big telco gets a qualified thumbs up from analysts.

Analysts are reasonably positive on Telstra, which is not as front and centre in the Australian investment context as it was, but is still a major consideration. The biggest issue is the dividend and Macquarie has a 4.1% dividend yield for the next few years, which will be fully franked.

The shares are on a high multiple, though. In 2022 the price earnings ratio is projected to be 32 times, although this will be a big drop from the current 41 times of this year. But it is still a long way above the current market average, which is about half that.

This is Telstra's performance against the ASX:

Macquarie sees the biggest plus as the mobile market:

‘Telstra provided mobile revenue aspiration of mid-single digit growth (FY21-25). Telstra indicated the key drivers underpinning this would be customer experience/value; 5G leadership; and 5G use cases. We view the mobile revenue growth aspiration as a positive, as it indicates intention to continue supporting a rationalising of the mobile market.”

Macquarie says Telstra is aspiring to become a Top-5 Energy retailer by FY25. “We remain cautious on execution on this pillar given the historical examples of telcos in energy retailing have been limited.” Macquarie noted an additional $500m of fixed cost reduction as “a positive particularly in light of investment in customer experience/service.”?

Goldman Sachs was also positive. “FY25 targets for strong earnings growth were provided, implying a high degree of confidence in the outlook, given expectations for mid-single digit EBITDA (earnings) growth per annum and a similar quantum of mobile service revenue growth.”

Goldman also noted that the company would be looking to pay out all its profits as dividends, the mark of a very mature company that is not looking to invest to expand. “Telstra also revised its dividend policy back towards 100% of EPS (earnings per share), as it prioritizes growing franked dividends over time.”

Goldman has a buy recommendation on the stock and a 12 month price target of $4.40. It is also projecting a dividend yield of 4.1%. Buy backs of stock were also suggested.

“On-market buybacks & un-franked dividends were highlighted, but we expect buybacks to be prioritized given the focus on growing franked dividends.”

The impliciation seems to be that Telstra is very much a dividend income play that is reasonably reliable. That reliability is probably not a bad thing in what is looming as global uncertainty, although no company's share price is impervious to shocks.


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