Telstra rewired

When Telstra first floated in 1997, many Australians were keen to own a part of the iconic household brand. While it is still the largest telecommunications company in Australia, changes in technology and establishment of the national broadband network are pushing the telco in new directions.

NBN Co will gradually take responsibility for all the fixed networks in Australia, which frees Telstra from its traditional network maintenance role.

However, it will retain ownership of its mobile networks and high-capacity links across Australia and Asia.

The chief executive of Telstra, David Thodey, told investors in mid-2010 the company was already preparing for a new era. "[Telstra] has got to move from being an engineering- and a technology-led company to being a truly sales- and marketing-led company," he said.

However, he added that "we need to keep our technology leadership".

Since then, Telstra has revamped its customer service and lowered prices to competitive levels. At a macro level, the government last week announced the "structural separation" of Telstra.

This means it will gradually hand over connections from the copper network to NBN Co. Rather than just using its own network, Telstra will pay NBN Co a wholesale rate to reach customers.

But the NBN also provides Telstra with new revenue streams, such as new applications over super-fast broadband and leasing its exchanges and underground pipes to NBN Co.

An analyst for Deutsche Bank, Andrew Anagnostellis, has Telstra on a "hold" recommendation and believes the share price will settle at $3.10.

This valuation is based on the sum of the parts of Telstra's assets on one hand and the risks Telstra faces on the other. Now that the deal with NBN Co is more or less complete, the biggest future risk is a substantial change to the project.

Anagnostellis expects Telstra to receive about $15 billion in cash from NBN Co by 2025, which turns into $11 billion once tax and inflation are taken into account.

Other risks include successfully implementing the strategy outlined by Thodey in 2010 and revenue pressure from competition as many companies fight for customers on the NBN. An analyst for Nomura, Sachin Gupta, has Telstra at a target price of $3.14 and also maintains a neutral holding.

His latest research note points out that while Telstra enjoys strong growth in mobile - it has signed up 2.5 million new mobile services in the past 18 months - the profit margin is lower than its fixed products. He notes the average monthly revenue per user is $55 for fixed broadband but $33 for wireless broadband. Telstra's strategy is to encourage customers to "bundle", or buy at least two products from the company.

Telstra is also very much a public company these days. Its 12.4 billion shares are spread among 1.4 million shareholders. The government gave its remaining 2.1 billion Telstra shares to the Future Fund in 2006 and the fund sold all but 100 million of those shares on the market between late 2009 and August last year.

About a quarter of Telstra shares are now held by overseas investors.

However, the telco is still regarded as one of the most widely held stocks in Australia. Last year, it's annual meeting took place in Sydney and was broadcast on direct video links to thousands of shareholders in Melbourne and Brisbane and to households using Telstra's T-Box device.

Investors who have been holding Telstra shares continuously since it first floated in 1997 have now received $3.71 in dividends per share - 41? more than the $3.30 sale price.

Those who bought shares during the T2 sale in 1999 at $7.40, which coincided with the dotcom boom, have received $3.40 in dividends.

And those who bought shares at $3.60 in the final government sale in 2006 have received $1.54 per share.

In coming months, analysts expect the Telstra board to announce plans to share cash from the deal with NBN Co among shareholders.

However, it is likely to be a long-term plan, with the money trickling in over 13 years.

Telstra's board members know that a fully franked dividend is important to shareholders, which is why a buyback of shares is more likely than a special dividend.

The company's former chief financial officer, John Stanhope, explained shortly before he retired last year that "our franking credits are just sufficient at the moment and they will be [able] over the next couple of years to pay 28? fully franked. And if you were to increase the ordinary dividend, it would not be fully franked".

His replacement, former AXA Asia Pacific chief executive Andy Penn, started last week. However, his predecessor also said "that is not to say in the longer term [an increased dividend] is not possible".