What Now for Australia’s Biggest Telecommunication Business?

Australia’s biggest telecommunications business continues to make headlines. It seems like Telstra Corp Ltd [ASX:TLS] is going from woe to woe.

On 17 August, the telco announced it would cut its payout ratio from 100% to 70-90%. While revenues and profits from continuing operations rose ever so slightly, investors just couldn’t get over that dividend cut.

Why should Telstra shareholders be so sensitive about dividends,’ Bloomberg columnist David Fickling asked.

The answer lies in the nature of Australia’s equity market, and in particular the 1.1 million retirees managing their own investments via self-managed superannuation funds.

Helped by years of tax breaks and laws mandating that companies fund their employees’ retirement savings, Australia’s gray army has built up a A$648 billion piggy bank.

The A$340 billion they have in equities and investment funds is equivalent to a fifth of the benchmark S&P/ASX 200 index, and their might is such that some analysts, such as Credit Suisse Group AG’s Hasan Tevfik, argue they’ve distorted the investment priorities of the wider market.

Take a look at the graph below. It shows the dividend payout ratios for various indices around the globe.

Dividend Payout Ratios -01-09-17

Source: Bloomberg

Aussie companies are some of the most generous in the world. Yet, as we’ve seen happen to Telstra, it’s doesn’t end well when you take away what investors have become so accustomed to.

But why shouldn’t Telstra retain a meagre 10-30% of earnings? As Telstra said in its annual report, it wants to become a global technology leader. It has already made investments into cloud computing, cyber security and the internet of things (the explosion of a number of smart devices connected to the internet). Now all it takes is time and hard work for those investments to pay off.

But for now, investors are looking at Telstra as if it’s a falling knife. They’re waiting until the knife hits the floor before they pick it back up.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

PS: Telstra isn’t the only company to pay attractive dividends. Check out the top five dividend stocks trading on the ASX right now.

 


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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