Should Telstra reduce its dividend?

It’s hard to get chief financial officers of any company excited but suddenly in his KGB interview (to be published today) Telstra’s money chief Andy Penn’s eyes lit up as he revealed a growth side of Telstra few have seen before.

Yet here is a company that, at least in nominal terms, did not cover its dividend in the latest half year. Take out abnormals and Telstra will cover a slightly higher dividend with some cash to spare (Telstra is finally off the hook, February 13).

Australian shareholders rejoice that the dividend is maintained and that their high income continues. They positively delight in higher payments.

After so many long hard years we regard Telstra as income stock and the analysts put pressure on the directors to restrain capital expenditure so the dividends can keep flowing and borrowings are restrained.

At the start of the KGB interview I made the mistake of trying to debate Andy Penn on Telstra figures. He was always going to win, and he did.

The discussion was aimed at showing that Telstra was not leaving enough money for capital expenditure, not in any way about solvency issues. Then at the end of the KGB interview came the surprise – the Telstra growth story.

Sometimes in Australia we forget what a growth company is. We overlook that CSL restrained is dividend and kept growing, eventually delivering huge rewards to shareholders – much greater rewards than would have come had CSL directors paid out all their profits or worse still boosted profits by restricting research.

Before discussing Telstra’s growth prospects let me take you to the world’s most ambitious growth play. Amazon has a price earnings ratio in the vicinity of 600 partly because it is depressing its profitability by enormous investment in the largest retail network the world has ever seen. Amazon’s plan is to blow as many conventional retailers as it can out if the water with an online offer in price and service that no one else on the globe can match. Australia is a clear target.

The US stock market believes that it is worth investing so much money in the Amazon growth future even though it depresses profits. Eventually the rewards will come on an enormous scale if Amazon dominates global retailing. (Amazon’s plans are part of the reasons why so many Australian retail stores will need less space and staff in 2015 and 2016).

When it comes to Telstra, Andy Penn says he has enough money to fulfill Telstra’s growth ambitions.

But I challenge this because Telstra's enormous growth prospects are literally buried in one or two lines deep in the latest report. Clearly directors are either not focusing on them or do not think they are a priority that requires sharing the good news with shareholders.

That’s why I was so surprised when Andy Penn spilled the beans. I recommend you watch him on the KGB video or read the transcript later today. If you are watching the video you may pick up the twinkle in Penn’s eye – it’s as though he is unleashed.

He unveils three enormous opportunities the likes of which few other Australian companies have. The first is to use the Telstra network and systems to transform health services in Australia by initially simplifying the procedures between medical practitioners. And then we go to hospitals, where paper-based practices from a forgotten era are still used. If Telstra could change this industry it would not only transform the company but slash Australia’s medical bill, while lifting the level of service.

The second growth area is just as large. Australian companies are increasingly using applications to deliver services and promote products. These applications must operate on different platforms and through different avenues. Add to that the enormous potential of cloud computing.

And finally in media – those with content (including Telstra) must deliver it through many different channels and many of those involve the Telstra networks.

To fully tap these three great growth avenues will require continual high-capital investment. The national broadband network will take some of the market depending on what form it takes.

Australians' fetish for income is causing Telstra to pay dividends that are too high given its growth agenda. I fully understand that the above statements will annoy David Thodey and Andy Penn plus a vast number of Telstra shareholders but Australia has few major corporate growth companies. Telstra is one of them.