Telstra’s stagnant share price since its August results says a lot about the market's perception of where future growth will come from.
When Telstra reported the market cheered and sent the stock 2.4 per cent higher on the day. Since this time the telecommunications giant has trod water against a broader index gain of 6.9 per cent.
In the 12 months leading up to reporting for the 2013 financial year, Telstra had gained a staggering 33 per cent. Gains were spurred by the commitment David Thodey had made to maintain the 28 cent annual distribution, essentially turning Telstra into a bond in conjunction with quality earnings prospects.
Telstra has focused on growing its core business over the past three years. Taking management time has been the national broadband network agreement, improving investment across mobiles and reducing costs. It has been a successful strategy for Telstra.
Expanding into Asia now commands a significant amount of attention from Telstra management. The telco, like other companies, has identified Asia as a significant market opportunity with its growing middle class and rapid urbanisation.
Revenue grew 16 per cent in Asia last financial year, confirming the potential for the sector. It is an entirely feasible thought for Telstra to expand internationally – other telecommunication giants such as AT&T and Verizon have built successful global businesses over time. The catch for Telstra will be execution – it needs to be on point.
Remaining tied to the existing business model will offer limited ability to accelerate earnings per share as growth opportunities remain constrained. While mobiles have been an extremely successful segment, snatching further market share from here will be challenging as the sector looks close to maturity in Australia. Handset and wireless broadband are essentially approaching a point of saturation, leaving price the major determinant of profitability.
In the pursuit of new growth, Telstra ultimately needs to, in part, recreate itself. If not, earnings per share growth from here looks muted.
Based on the current environment, estimates for future earnings per share as compiled by Bloomberg are as follows;
Earnings per share growth until 2015 only comes in at 3.3 per cent a year. While this is possibly lower than investors would seek, a dividend payout ratio of around 90 per cent will still ensure Telstra remains relatively attractive on a yield basis, especially if the cash rate remains depressed.
While it is difficult to please the regulator, shareholders and customers, the past few years have been relatively smooth sailing for Telstra and there is no reason why the years ahead can’t follow suit once a growth strategy is nailed down.