INSIDE INVESTOR: Telstra's rise to stock market stardom

The one time ugly duckling of the market has turned itself into a swan in investors' eyes, delivering yields that outdo bank term deposits.

Talking of turnarounds, who on earth would have thought that Telstra would ever achieve the status of stockmarket darling. But the top telco, after almost a decade in the doghouse, was one of the star stockmarket performers of 2012.

Where it once was a company dogged by declining revenues on its old copper line network and with a profit strategy that revolved around cutting costs, last year saw it emerge as a corporation that actually had a goal that involved growth.

That change was forced upon the company by the Federal Government which, after years of frustration on the construction of a new broadband network, ordered Telstra to split in two and to hand over its network.

Initially perceived as a disaster for Telstra, the formation of NBN Co has liberated the nation’s biggest telco. It no longer will have the task of maintaining a century old and out-dated piece of hardware. And, as a consolation prize, was handed $11 billion in compensation for the privilege.

That compensation payment has enabled Telstra to maintain its strong dividend. And in an era where dividend yield is everything, investors began piling into the company.

Even after the hefty share price rises – which has catapulted Telstra into seventh spot of Australia’s biggest companies – it still is delivering a dividend yield of more than six per cent. If you take franking credits into account, investors can earn just shy of nine per cent with an investment in Telstra.

That’s much better than you’ll get from a term deposit.

The big question is how Telstra invests its windfall gains from the NBN deal in the future. The company will no longer hold a monopoly on fixed line telecommunications infrastructure.

In the past, it made the bulk of its profits from renting out its lines to households and businesses and to its competitors who also offered fixed line services.

In the future, Telstra will be a retail operator only, albeit the biggest by far. The cash from the NBN deal will deliver a lot of clout. But it will be up to the company to invest it wisely.

So far, it has done just that. In addition to negotiating a fabulous deal on the NBN, Telstra’s board and management has upgraded its mobile technology to world class standards. But the introduction of a national broadband network will open up opportunities and challenges for all in the industry.

Within the next few years, Telstra will gradually move to a full competitive position with its rivals – however this will require continued sound management if the telco wants to maintain its edge.

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