Telstra's good news pays dividends as its shares bounce back

TELSTRA closed at $3.54 yesterday, its highest share price since December 2009, as investors fled to defensive stocks.

By InvestSMART · 27 Apr 2012

By InvestSMART ·
27 Apr 2012

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TELSTRA closed at $3.54 yesterday, its highest share price since December 2009, as investors fled to defensive stocks.

Telstra has confirmed it will maintain annual dividends at 28? for the next two years. It will also set aside billions from its deal with NBN Co for a possible dividend increase after 2014.

Shares surged 7? on Wednesday's closing price and reached a 30-month high. Telstra plunged to $2.79 last August amid fears it would not complete the deal with NBN Co.

Chief executive David Thodey said last week Telstra would consider increasing dividends in 2014, when it had enough franking credits, or conduct an on-market share buyback.

The telco finalised a deal with NBN Co on March 7. It valued the deal at $11 billion in 2010. Last week Telstra revealed it would take in $2 billion to $3 billion in excess cash flow over the next two to three years, with regular annual payments from 2015 onwards.

Telstra is one of the highest-yielding stocks on the market at around 8.75 per cent attractive in light of a likely cash rate cut by the RBA next week.

Analysts say foreign investors have become interested in Telstra because of its high yield. Geoff Voller, senior private client adviser with RBS, said his domestic clients had been looking for low-risk defensive shares over the past four to six weeks. "And following the NBN deal and some really impressive presentations by David Thodey, I think people are starting to get a lot of confidence that the Telstra business model is a good one," he said.

"An increase to dividends or a share buyback would also push up the share price leading to a capital gains."

The Federal Court this morning will deliver its judgment on an appeal by Telstra, the AFL and the NRL against a decision allowing Optus to sell a mobile television service.

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Frequently Asked Questions about this Article…

Why did Telstra shares bounce back recently?

Telstra shares rose after investors moved into defensive stocks and confidence improved following the finalisation of its NBN Co deal on March 7. The stock surged about 7% to reach a 30‑month high and closed at $3.54 — its highest price since December 2009, according to the article.

What is Telstra's current dividend policy and will dividends be maintained?

Telstra has confirmed it will maintain its annual dividends at the current level for the next two years. The company also plans to set aside billions from the NBN Co deal that could support a dividend increase after 2014.

Is Telstra likely to increase dividends in 2014?

Telstra's chief executive, David Thodey, said the company would consider increasing dividends in 2014 when it has enough franking credits. He also mentioned an on‑market share buyback as an alternative, so any increase depends on franking credits and board decisions.

How does the NBN Co deal affect Telstra's cash flow and potential payouts to investors?

The NBN Co deal is expected to free up significant cash for Telstra. The company revealed it expects $2 billion to $3 billion in excess cash flow over the next two to three years, with regular annual payments from 2015 onwards — funds that could be used for dividends or buybacks.

Could Telstra undertake a share buyback and how would that affect shareholders?

Yes. Telstra has indicated an on‑market share buyback is a possible option. Analysts in the article suggested a dividend increase or a buyback would likely push the share price up and could lead to capital gains for investors.

Is Telstra considered a high‑yield stock right now?

According to the article, Telstra was one of the highest‑yielding stocks on the market at around 8.75%. That high yield has attracted interest from foreign investors and made it appealing to income‑focused, defensive investors.

How have Telstra's share prices moved over the past year?

The article notes Telstra plunged to $2.79 last August amid fears it would not complete the NBN Co deal, but by the latest trading it had recovered to $3.54 — its highest since December 2009 — after the deal was finalised and investor sentiment improved.

What is the Federal Court appeal involving Telstra and could it affect investors?

The Federal Court was due to deliver judgment on an appeal by Telstra, the AFL and the NRL against a decision allowing Optus to sell a mobile television service. The article does not specify the likely market impact, but such legal outcomes can influence investor sentiment depending on the ruling.