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

Telstra closed at $3.54 yesterday, its highest share price since December 2009.

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.

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…

What happened to Telstra shares recently and why did the price jump?

Telstra shares closed at $3.54, their highest level since December 2009, after a 7% jump that pushed the stock to a 30‑month high. The rise followed investor interest in defensive, high‑yielding stocks and renewed confidence after Telstra finalised its NBN Co deal.

What dividend policy did Telstra confirm and how long will it last?

Telstra confirmed it will maintain annual dividends at 28 for the next two years, and said it will set aside billions from its NBN Co deal to potentially increase dividends after 2014.

How does the NBN Co deal affect Telstra’s cash flow and dividend prospects?

Telstra finalised the NBN Co deal on March 7 (the deal was valued at $11 billion in 2010) and said 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 support higher dividends in the future.

Is Telstra likely to do a share buyback or raise dividends soon?

Telstra’s CEO David Thodey said the company would consider increasing dividends in 2014 when it has enough franking credits, or conducting an on‑market share buyback. Analysts say either move would likely boost the share price and produce capital gains.

Why are investors, including foreign buyers, showing renewed interest in Telstra?

Analysts point to Telstra’s high yield (around 8.75% in the article) and its defensive business profile. The NBN deal and confident presentations by management have also increased investor confidence, attracting both domestic low‑risk investors and foreign buyers seeking income.

How much excess cash flow did Telstra say it expects from the NBN deal and when will it start?

Telstra said it expects $2 billion to $3 billion in excess cash flow over the next two to three years, with regular annual payments starting from 2015.

Could a cut in the RBA cash rate affect Telstra’s attractiveness to investors?

Yes. With Telstra’s high yield (around 8.75% as reported), the stock was described as especially attractive in light of a likely RBA cash rate cut, which can make high‑yielding shares more appealing relative to lower interest rates on cash and fixed income.

Are there any legal or operational uncertainties investors should know about?

The article notes a Federal Court judgment was due on an appeal by Telstra (along with the AFL and NRL) against a decision allowing Optus to sell a mobile television service, and it also recalls Telstra’s share plunge to $2.79 last August amid fears the NBN deal might not be completed — both items highlight past and potential legal/operational uncertainty.