Telstra dangles a dividend carrot for 2014

David Thodey once again has driven the Telstra (TLS) money machine faster and harder than anyone expected.

While he has quashed hopes of a greater reward for shareholders from this result, he has dangled the prospect of higher dividends in the year ahead.

Investors have been piling into Telstra shares in recent months on hopes Thodey would lift the final dividend, raising it from 14c to 15c for the second half (see Simon Lindsay's The hidden power of franked dividends). That hasn’t happened. But the Telstra chief has pointed to a more flexible payout policy in the future.

Given the growth in profits, particularly in the mobile division, the company should be able to lift dividends in the year ahead. The payout ratio, while already high at 91%, is well below last year’s 102%.

An ordinary company would be restricted in lifting such an elevated ratio during a major capital expenditure program, such as Telstra’s current rollout of its 4G network.

But an ordinary company would not have the long term luxury of massive income that Telstra will enjoy in the years ahead as it migrates fixed line customers to the NBN.

Net profit rose 12.9% to $3.865 billion, easily exceeding forecasts for $3.77 billion on revenue growth of 1.9% to $25.98 billion. Costs grew at just 0.5%.

For the year ahead, growth in income and earnings before interest, tax, depreciation and amortisation is forecast in the “low single-digit” range.

Telstra’s domination of the mobile market continues apace, signing up an extra 1.3 million customers, a result that brings the total number of mobile customers to more than 15 million.

As Thodey said this morning: “This is profitable growth.”

Its dominant national mobile network has allowed it to sell 2.8 million 4G devices, ensuring it retains a growth profile in the mobile division.

There was solid growth in its international division, with good results from its Hong Kong operation.

The problem areas remain, though. Sensis revenue declined 7.8% as the business endures the difficulties sweeping global media operations from the internet revolution. Digital revenue growth was insufficient to compensate for print declines.

Its old fixed-line business also maintained the long term declining trend with a 3.6% decline as 287,000 customers switched off their landline services. That statistic alone highlights just how much of a bonanza the NBN has been to Telstra.

It has sold a high-margin business in long-term decline for a fortune to fund growth in new technology.