About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
20 June 2017, 10:40 AM
Sectors Covered:
Telecommunications, Technology

Key points

  • This August will be a critical time for Telstra (TLS) shareholders as we will likely hear the Boards view on dividends and/or capital management in a post-NBN world.
  • Over the next five years TLS's earnings are propped up by one-off gains (disconnection payments) from the NBN which more than offset the short term NBN margin pressure. Post these one-off gains (and assuming the NBN remains in its current form, which we view as unlikely) then earnings for TLS drop off.
  • In our view, the million dollar question is 'Does this capital management framework provide the catalyst to rebase dividends?' We acknowledge that a lot will change in the coming years but think this is business as usual for Telstra.  

Refreshed capital management framework due out shortly

After taking on board shareholder feedback for about nine months the Board of Telstra (TLS) is considering its capital management framework with a view to potentially (or not) rebasing dividend expectations for a post National Broadband Network (NBN) world. The outcome of the Boards deliberation is expected before the end of November 2017. We think TLS's August 2017 result is the most logical time to release this. The possibility of a dividend cut (albeit softened with buy-backs and other capital management) is something investors need to be conscious of. 

Our view is that Telstra will not cut the dividend but some think they will.

Mind the earnings and possibly dividend gap

The reason earnings and the dividend are at risk is that one-off payments from the NBN to Telstra expand from approximately 10% of 1H17 reported EBITDA to approximately 25% in FY21 (on our forecasts). These one-off payments account for a net A$5bn (or A$10bn before tax and TLS's costs) and end around FY21. Without them, TLS's sustainable EPS is less than the current 31 cent dividend. 

If the Board is convinced TLS can fill the earnings hole from the NBN (post the one-off gains) then they are likely to hold the dividend. If they think this is an uphill battle, and the 31 cent dividend is not maintainable longer term, they may reset expectations at the release of this capital management framework.

We think the medium term outlook is better than it appears

Our view is that the NBN's financial expectations are likely to disappoint. We expect NBN take-up to be lower than forecast due to competing technologies (which offer better value) and there being fewer premises (a smaller addressable market) than the NBN thinks (clients can login to view our sector note – NBN economics under inspection for more details). In our view, this means that Telstra and others won't have as big a hole in their earnings as predicted because they won't be paying the NBN as much as predicted.

Investment view

In the short term we think the share price risk for Telstra (TLS) lies to the downside. Our FY18 EPS forecasts sit 7% below consensus and we are relatively cautious of expectations heading into the August result and capital management. In the long term, we see upside risk (assuming our views about the NBN are correct). We do not expect a dividend cut but highlight this is a risk heading into the result.

We maintain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Telstra Corporation (TLS). Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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