A new normal for Telstra

Business Spectator

Telstra annual meeting has marked an important punctuation point in the group's history; the start of a ‘'new normal'' for Telstra.

Both chairman Catherine Livingstone and chief executive David Thodey made a particular point of noting that it was the first Telstra annual meeting in four years where the central topic of debate wasn't the National Broadband Network.

There were two specific issues that flowed from the conclusion that the traumatic imposition of the NBN on Telstra by Stephen Conroy and Kevin Rudd at gun point and the protracted and delicate negotiations that followed is now behind the group.

One was a piece of house-keeping, albeit a very significant one. From the moment Conroy and Rudd threatened to declare war on Telstra if it didn't co-operate with the vision they dreamed up on a plane trip the only thing keeping a floor under the Telstra share price through most of the past four years was its promise that it would maintain its 28 cents a share fully franked dividend.

Today Livingstone confirmed Telstra would pay a 28 cents a share dividend in 2012-13 – but said after that it would consider dividends, on a half-yearly basis, in the context of the group's capital management framework. The guiding principles within that framework, she said, were that the dividend remained fully-franked and that the board would seek to increase it over time.

In other words, Telstra will now determine its dividend like any other company, taking into account its financial condition at the time.

With the Telstra share price having bounced of its sub-$3 nadirs, the agreements with NBN and the Federal Government and the $11 billion of net present value they will deliver in place and generating cash and an expectation that Telstra will generate $2 billion to $3 billion of surplus cash over the next three years there is no longer a need to use the dividend to provide a floor for Telstra's share price.

Thus the return to a conventional approach to dividends is an important statement that the disruption and uncertainty created by the NBN is receding and that the board is now comfortable and indeed confident about the group's near and medium term prospects.

The other telling comment Livingstone made was in relation to the $11 billion net present value of the future cashflows the deal with NBN Co and the government is estimated to generate over the next couple of decades.

‘'The $11 billion value was relevant at the point in time when the company was making decisions on whether to enter into the NBN agreements and was a post-tax net present figure discounted to 30 June 2010,'' she said.

‘'However, with the negotiations having concluded, that June 2010 figure is no longer a relevant benchmark.''

In one sense that's a statement of the obvious. The $11 billion was never a lump sum and in future the cash flows from NBN Co will flow and be mingled with Telstra's other cash flows and be reported as they are received, offsetting the decline in cash flows from the copper network as customers are migrated to the NBN's fibre and Telstra's copper lines are gradually disconnected.

The $11 billion was, however, never a precise or ‘'real'' number. It was a NPV calculation based on a host of assumptions about how much and how and when cash would be received from NBN Co over the next 20 years or so.

It is instructive that Telstra independent experts, using a lower discount rate, valued those same income streams – roughly $5 billion for providing NBN Co access to its infrastructure, $4 billion for disconnections and $2 billion from the Federal Government – at $12.8 billion.

In reality, over the next several decades, Telstra will receive multiples of those discounted amounts in absolute dollars and will do so regardless of whether or not there is a change of government and policy next year – as Livingstone said, the agreements in place would form the basis – Telstra's non-negotiable bottom line – for any new negotiations.

Telstra has always been very careful not to frame the value of the NBN-related deals in terms of the absolute dollars involved or to compare its post-NBN position with what it might have looked like had the NBN never been contemplated.

Without the NBN, of course, Telstra would still have faced some challenging issues. There is a massive shift in customer activity occurring from fixed line services to mobile services and from traditional voice services to data and video that was already impacting its revenues and margins. 

Telstra will now have annuity income streams that will not just compensate it for the lost revenue that will occur as customers are transferred off its copper network but for the revenue that would have been foregone anyway as the usage of the copper network changed. Plus it will progressively experience a diminishing of the operating and maintenance costs of an ageing copper network.

Telstra has been careful not to play up the gains it has made as a result of the NBN negotiations relative to what might have been had there never been an NBN and the fact that the cash flows from NBN Co will be received over decades will make it near-impossible to calculate the real value of the deals to Telstra.

While the ‘'new normal'' for Telstra will be a progressively more competitive one as the core of its old monopoly is displaced by the NBN, and will revolve around its ability to compete on a more level playing field, the massive annuity streams that will flow from NBN Co over the next couple of decades (whatever they eventually amount to) will provide a core element of stability to Telstra's cash flows within what could be an increasingly competitive and volatile sector.