The Distillery: Telstra by the book

Jotters search for dividends clues in the Telstra chief’s address, with one praising his ‘boring’ but steady approach.

Telstra boss David Thodey gave one of his trademark calm and collected results presentations yesterday to a posse of shareholders drooling over one thing – the dividend. This morning Australia’s business journalists give a play-by-play account of why Thodey wouldn’t be drawn on long-term guidance on that mouth-watering matter.

Also in this Friday’s monster edition of The Distillery, new Rio Tinto boss Sam Walsh has delivered his first real set of numbers for the mining giant with news that the sale of Pacific Aluminium has been called off; for better or much worse, Rio is stuck with those unwanted assets.

But first, we start with Telstra. The Australian Financial Review’s Chanticleer columnist Tony Boyd explains the three scenarios under which Thodey would want to keep quiet about where dividends are headed.

“The bearish view is that the company is so worried about the uncertainty caused by the possible change of government that it is unwilling to give any guidance …The bullish view is that chief executive David Thodey and chief financial officer Andy Penn are planning to lift the dividend in 2014 through higher progressive payments and possibly a special dividend …The third, most mundane view about dividends is summed up by what the company actually said: ‘We have returned to our normal policy of advising on dividends as they are declared in conjunction with our results,’ Penn said. However, Chanticleer would point to the fact that 2013 marks a significant turning point in Telstra’s recent history. It is the first time in more than five years that earnings per share have exceeded the dividend.”

The Australian’s Mitchell Bingemann says Thodey is Corporate Australia’s Mr Nice Guy, who offers a consistent ‘steady as she goes’ message for Telstra shareholders. Rocking the boat isn’t his style.

“An unkind epithet might be boring, but in this age of political uncertainty and economic shocks, boring, it could be said, is best. And boring and benign is exactly what Telstra's 1.4 million shareholders got yesterday as Thodey delivered another full-year profit result devoid of drama or surprise.”

The Australian’s John Durie might agree with Bingemann that Thodey is the ‘slow and steady’ guy, which is a good thing given the one-track mind of shareholders.

“…All the punters care about is next year's dividend and how soon they will collect the promised returns from the national broadband network. Thodey's four years at the company have had highs and lows, but having guided the company back to what promises to be better times, he is unlikely to bet the farm on a break-out deal. Instead he is aiming to build a portfolio of assets in growing markets such as network applications, cloud services and software applications, which will give the company a point of difference. The base is a superior delivery platform, which he has in Australia and is building in Asia, and to that he will add software and other applications to maintain the growth. Some might want him to put his foot firmly on the accelerator, but while happy to point to the opportunities, he is playing his cards close to his chest.”

Business Spectator’s Stephen Bartholomeusz says that with or without the NBN, Telstra is facing a decline in its copper network and its Sensis directories business.

“Public switched telephone network revenues were down 2.7 per cent and earnings before interest, tax, depreciation and amortisation 6.1 per cent, with the fixed voice revenues down 9.5 per cent or $459 million but fixed broadband revenue up 5 per cent, or $100 million. The EBITDA margin in the division actually edged up from 60 per cent to 63 and cent. In the Sensis business revenue was down 11.7 per cent and EBITDA 21.7 per cent, with the legacy print business revenues falling 19.9 per cent while the lower margin digital business grew 11.3 per cent. The continuing decline in those two legacy businesses meant that Telstra needed to find $400 million of new EBITDA just to stand still. In fact it found twice that amount, with group EBITDA rising from $10.2 billion to $10.6 billion.”

Indeed, Fairfax’s Malcolm Maiden notes the traction that Thodey is getting in business service expansion.

“International revenue was up 16.2 per cent or $243 million during the year, and the group's network applications services offer to businesses in the region lifted revenue by 9.4 per cent to $566 million. Counting Australia, NAS increased revenue by 17.7 per cent to $1.5 billion. These businesses won't be big enough to plug Telstra's earnings gap for several years, however, so Thodey has to continue making Telstra's existing operations more profitable, pound-for-pound. The circular logic is that it is the only way he can keep dividends high, balance-sheet gearing low, and still invest enough to generate new business that fills the earnings gap and keeps Telstra growing. So far however, the balancing act is succeeding.”

Fairfax’s Elizabeth Knight observes that Telstra is the chief beneficiary of the recent troubles with Vodafone and has also made inroads against main mobile rival Optus.

“But therein lies some of the risk. The number two and three players in the market can’t afford to have Telstra continue to increase market share in a market that is now in natural decline. The launch by Vodafone of an attractive international roaming package is a classic case in point. Telstra boss David Thodey was questioned on how he would respond. He didn’t give too much away but these competitive challenges are just the thing that Telstra can’t and won’t ignore.”

The other big corporate story from yesterday was the first real set of results from Rio Tinto’s Sam Walsh. The Australian Financial Review’s Matthew Stevens begins with the fact that Walsh entered the business promising strong capital efficiency and cost discipline.

“So, in hitting consensus revenue, cashflow and profit numbers right on the button while sustaining a claim to over-delivery on savings targets, Walsh has made a fair old start with what should be received as the first set of numbers that reflect his direction and strategy. Mind you, the scuttling of the Pacific Aluminium sale so soon after deciding to withdraw the diamonds business from the market and news that the sale of his Canadian iron ore pellet business might not be going so well either says that not all is going to Walsh’s ambitious plan to unburden Rio of its sub-scale businesses and start carving away at his $US29 billion ($32 billion) debt burden.”

But, given that it’s his first set of numbers, Stevens urges readers to focus on the positives. The Australian’s Barry Fitzgerald notes there are many.

“Like the rest of the industry, Rio let costs get hopelessly out of control while the mining boom was running hot. If evidence of that is needed, look no further than the $US1.5 billion of total cost improvements achieved in the June half, split into $US977 million in operating cost improvements and $US483 million from exploration and project evaluation cutbacks. The latter one was easy to achieve, the former not so easy; painful, too, given the reduction in headcount it incorporates.”

Business Spectator’s Stephen Bartholomeusz believes that Walsh, and chief financial officer Chris Lynch, are only getting started.

“Given that Walsh and Lynch have really only had a very brief time in charge – Walsh was appointed chief executive in January and Lynch, previously a non-executive director of the group, in April – they’d be pleased with the start they’ve made towards re-positioning Rio Tinto for the post-boom environment. It’s obvious from Walsh’s commentary and his open concern about the balance sheet, however, that they both believe they’ve got a lot more work to do to get the group from where it is today to where they want it to be.”

Meanwhile, The Australian’s economics correspondent Adam Creighton has become tired with the endless ‘gotcha’ calls between the parties in regards to costings and urges them to focus on what their policies will actually do.

Fairfax’s Tim Colebatch takes one look at the latest confusing seasonally adjusted unemployment figures and speculates on why economists continue to focus on them despite repeated warnings from the Australian Bureau of Statistics not to do so.

And finally, Fairfax’s Adele Ferguson has noted that the last thing small businesses will want right now is a visit from the taxman. The Australian Taxation Office is responsible for nearly half the 1365 company wind-up notices in the past three months