Sustained growth in mobile and digital shows telco is ready to dial up future

What's new Telstra recently reported another solid set of results, with net profit after tax rising 12.9 per cent to $3.9 billion for the 2013 fiscal year and slightly ahead of consensus expectations.

The mobile business was once again the star performer for the company, with subscribers up 1.3 million to 15.1 million and revenues up 6 per cent to $9.2 billion.

The division enjoyed particularly strong growth in the mobile broadband and prepaid hand-held segments. Hardware sales of $1.34 billion also showed double-digit growth.

With this result, revenues in the mobile business have now increased at a 7.2 per cent compound rate during the past three years and earnings before interest, tax, depreciation and amortisation at a compound rate of 15.7 per cent.

In line with guidance, the Telstra board declared a final dividend of 14¢ a share, bringing the total dividend for the year to 28¢ a share, rewarding shareholders with the sturdy fully franked income they have come to crave.

Outlook An investment in Telstra is premised primarily on the company's free cash flow-generating ability and its capacity to transition from a legacy-based business model to a mobile and digital-centric one. We believe Telstra's free cash flow-generating ability (about $5 billion in fiscal 2013) will allow the company to do just that, while continuing to reward shareholders with a solid dividend stream.

This is further supported by Telstra's robust financial position, with the latest 50.2 per cent gearing at the bottom of the target zone of 50 per cent to 70 per cent and the interest cover at a comfortable 12.4 times.

Price Telstra has been one of the pin-up stocks of the past couple of years amid insatiable investor appetite for solid, sustainable yield. Indeed, during the past six months and 12 months, the stock has risen by 10 per cent and 34 per cent, respectively, while shareholders in the telco have also been rewarded with hefty dividends along the way.

Worth buying? We do not expect Telstra to set the world alight with rapid growth in revenues and earnings. However, its results show solid progress in transitioning from a legacy fixed-line monopoly to a mobile-centric entity in digital and data telecommunications. With its robust free cash flow and scale, we believe Telstra can maintain its leadership of the Australian market and continue to modestly increase its dividend, which equates to a fully franked yield of about 5.7 per cent. In a very low interest-rate environment, this should provide significant support to the stock price for existing shareholders. Yet the stock is trading at more than 15 times consensus fiscal 2014 earnings per share estimate, having enjoyed a prolonged period of re-rating. We believe those without exposure should wait for a pull-back in price before buying.

Greg Smith is managing director at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, call 1300 881 177 or email info@fatprophets.com.au.

Upward trajectory