THE DISTILLERY: Telstra tick

Jotters back Telstra's decision to opt against a share buyback, while one says FlyBuys could up the stakes in the supermarket wars.

Business commentators have thrown their support behind Telstra boss David Thodey for opting against a share buyback for the time being. As Business Spectator’s Stephen Bartholomeusz explains, Telstra has cash, but not enough to materially impact its figures through a buyback or increase its dividends in a meaningful way. The Australian Financial Review’s Michael Smith adds that Telstra has a credit rating to worry about, while The Age’s Michael Maiden says Telstra is keenly aware of how fortunate the copper decommission deal is. Elsewhere, The Age’s Adele Ferguson says the rekindled FlyBuys offer from Coles could have Woolworths sweating.

But first, Business Spectator’s Stephen Bartholomeusz explains how Telstra does expect to be sitting on a pile of money by the end of the year.

"They made the implicit case, however, as to why neither a buyback nor an increase in Telstra’s 28 cents a share dividend made sense in the near term, albeit without explicitly ruling anything out. Essentially, the size of a buyback Telstra could do today simply wouldn’t be large enough to make a material difference to its performance statistics and share price, while it doesn’t have the franking credits to pursue its preferred way of distributing cash to shareholders – an increase in its dividend…The objective of the briefing wasn’t to signal anything related to capital management was imminent, but rather to provide the market with a very clear and detailed framework to understand how Telstra will think about its balance sheet and its deployment of excess cash going forward.”

The Australian Financial Review’s Chanticleer columnist Michael Smith says Telstra is thinking about more than return on equity.

"Telstra needs to maintain its single A credit rating and keep the financial flexibility to make strategic investments while protecting the existing dividend. It has debt-funded spectrum auctions to worry about and possible acquisitions in digital media. There is also uncertainty about the rollout of the NBN to consider and movement of customers from the copper network to the fibre network.”

And The Age’s Malcolm Maiden says Telstra’s decision to pause before launching a share buyback with the NBN funds solidifies its place as a yield stock.

"He (Thodey) told yesterday's briefing on Telstra's post-NBN plans that he had recently discovered a 1995 strategy paper prepared for the chief executive who set up Telstra's privatisation, Frank Blount. It predicted that revenue from voice services on Telstra's copper wire network would be zero by 2010. The copper wire network survived because technology enabled it to be used for broadband. Now, Telstra is actually being paid to decommission it – and it is largely agnostic about how the network that replaces it is built: it has doused hopes of a quick capital return, but the prospect of the cash underpinning higher franked dividends in the medium term is real.”

Elsewhere, The Age’s Adele Ferguson finds Coles taking the supermarket wars back to the skies with the relaunch of its FlyBuys program.

"The revamped loyalty card, which has the potential to be a game changer in the lucrative world of loyalty programs, includes a new discount proposition, my5, which will give FlyBuys customers an added incentive to swipe their card. It will give customers 10 per cent off five products of their choice based on an offering of 5500 products. The prospect of bigger discounting has sent shivers down the spines of suppliers already caught in the crossfire of the fierce price war between Coles and Woolworths. But if Coles can pull it off, and offer a better suite of options from Woolworths, it has the potential to spin the loyalty business off into a separate listed entity down the track.”

Staying with company news for the other business comments this morning, there was also a lot of copy about Commonwealth Bank this morning. The Australian’s Richard Gluyas says CBA’s new chief executive, Ian Narev, explained in about as much detail what he won’t do as company boss as what he would do, during the briefing yesterday. It was an exercise in quietly bashing his competitors. The Age’s Eric Johnston explains how Narev plans to secure superior customer satisfaction ratings and a bigger slice of the business lending market. And The Sydney Morning Herald’s Elizabeth Knight expands on recent comments about the technological advantage that Commonwealth Bank now enjoys over its rivals.

In other company news, The Age’s Peter Cai and Peter Ker look on as BHP Billiton finally joins the China Beijing Metals Exchange, while The Age’s Michael West asks whether Interoil is a tearaway stock or a con. The Australian’s John Durie says former Newcrest Mining boss Ian Smith is radically changing the management structure at Orica, while his colleague Bryan Frith looks at the increasingly complicated takeover picture of Minemakers and UCL. Meanwhile, Fairfax’s Insider columnist Ian McIlwraith touches base with Hydromet Corporation, as The Australian’s Tim Boreham examines Octagonal Resources, Australian Pharmaceutical Industries and Telstra in his Criterion column.

Turning to economic news, The Age’s Tim Colebatch says Victoria and Tasmania are taking the biggest hits from the slowdown in the non-mining economy. The Australian’s economics editor David Uren cleverly points out that the government’s implied argument that cutting the budget will give the Reserve Bank more room to lower rates validates the Coalition’s argument that Canberra’s spending has been keeping rates high. The Australian’s economics correspondent Adam Creighton praises Joe Hockey for at least having the courage to tell Australia we need to harden up.

And Giles Parkinson writes in The Australian that the Coalition’s anger at the $10 billion Clean Energy Financial Corporation is perplexing, given that its Direct Action policy is essentially the same thing, only smaller.