Thodey's Telstra plans have huge implications for shareholders

Should Telstra be an income or growth stock? Shareholders want it to be an income stock and hand all its profits and balance sheet capacity in cash payments to them. That would be an unmitigated disaster, in my view.

Shareholders have a lot to thank chief executive David Thodey for, but one of his shortcomings is that he has not explained to shareholders that if Telstra is to prosper longer term it will have to invest in growth.   

When I told David Thodey in his KGB interview (to be published later today) that history would mark him down on the growth front, what emerged was a remarkable set of revelations about Telstra's growth prospects and plans.

These revelations include big plans for Asia and a set of new directions for Australia. This aggressive new strategy will see Telstra reposition itself over the next five years so that much more of the company’s profits will come from overseas. This is a huge change of direction for the company, and for Thodey, who has spent the past few years trying to steady the company.  The implications of this change in direction for shareholders should not be underestimated.

After proving his worth to shareholders, Thodey is embarking on this ambitious growth plan, but he believes it will still be a balanced portfolio approach. The foundations have been set for growth in Asia, Telstra now needs to convince shareholders it’s the right direction to take.

In the interview he promised that, come profit time in August, the board will set out a long-term capital program that would detail future distribution, borrowing and capital strategies to fund this growth and retain Telstra's status as an income stock.

It will be one of the most important statements made by Telstra in recent years and will overshadow the profit. It's true that Telstra has capacity to borrow more to fund its growth plans. The danger is that Telstra will succumb to the institutions who want this balance sheet capacity used for share buybacks.

What Thodey explained to us in the interview was that Telstra has to move on from its current model into a very different path and, in addition, needs to have more of a global -- or at least Asian -- focus.

If Telstra attempts to go down this path with insufficient funds it will be butchered. But staying still is not an option. We will await August.

Footnote: One if the growth areas that Telstra sees for itself is in medical communications. Thodey understands that medical costs can be slashed with better use of systems. But vested interests make it tough. He will need to study the Barwon model, where what he is aiming to achieve has -- at least in part -- been secured (How to save our sick health system without GST hikes, May 21).