Rudi's View | Aug 23 2017
In this week's Weekly Insights:
-More Pain For Telstra Shareholders
-Rudi In The Australian Newspaper
-Rudi On BoardRoomRadio
-AREITs In Top Form
-The Gillette Factor In Health Insurance
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
More Pain For Telstra Shareholders
By Rudi Filapek-Vandyck, Editor FNArena
All good things must come to a (divid)end. This is how analysts at Credit Suisse responded to Telstra's ((TLS)) much larger than anticipated dividend shock last Thursday.
Sometimes a lot of creativity goes into research report titles. Most investors never get to see or appreciate them. So I thought I would honour Credit Suisse's smart word play in today's follow up on Telstra.
Most shareholders have been on Telstra's register for many years. It has been a mixed experience, to say the least. The shares surged to nearly $9 during the dotcom bubble days. That was back in 1999. After that, a long drawn out slide unfolded that lasted more than a decade, ultimately pulling Telstra's share price as low as $2.60 by late 2010. That's a capital loss in excess of -70%.
Between October 2010 and early 2015 the shares rallied in excess of 150% to $6.70. Since February 2015 (31 months ago) the shares have lost -42.5% in value.
Now the dividend promise has been reset, with one final jumbo payout of 15.5c on September 28, most shareholders will be asking the question whether a bottom is finally in sight?
Given the lure of that big final payout, and a general reluctance among retail investors to take a loss, no one is able to answer the question with great certainty until Telstra shares go ex-dividend on August 30th.
One shareholder, DNR Capital, believes the shares are likely to fall further than the upcoming 15.5c final dividend payout and has decided to sell all shares ahead of the event. DNR Capital's logic is based upon the observation that Telstra's historic dividend yield is 6%. After the 10%+ sell down post Telstra's new dividend policy announcement, the shares are still trading on a dividend yield (forward looking, 22c) of around 5.7%, so DNR Capital's concern seems justified.
But history is not necessarily the best guide. The market has been treating Telstra as a company cum dividend cut since 2015, which it might not do in the year ahead. Then again, bond yields might be rising later this year and next, and it appears there remains an unhealthy dose in uncertainties when it comes to operational dynamics and competition for telcos in Australia in general, and for Telstra in particular in the years ahead.
One important signal that should not be underestimated by investors and current shareholders is that Telstra's announcement last Thursday about the new payout of 22c in FY18 was that the number consisted of regular plus special dividends. Analysts rightfully picked up on this with views that once payments from the National Broadband Network (NBN) cease, this could open the door to Telstra only paying out regular dividends.
Already speculation has started about when the next dividend cut could be announced. In three years time, maybe? Could be as low as 16.5c.
The more optimistic analysts point out there certainly is room for upside surprise as well. There can still be a better-than-expected outcome from the planned securitisation of NBN receipts. There still is potential for an additional share buyback.
JP Morgan, which has been one of Telstra's most fervent and loyal supporters throughout the 2015-2017 de-rating, considers last week's -30% dividend cut a worst case scenario outcome. The company's intention to invest more of NBN receipts while paying less to shareholders does not instill JP Morgan analysts with a lot of confidence that all shall be alright in the end.
A special mention goes out to Morgan Stanley's view that telecom services should now be seen in the same light as newspapers and free-to-air TV operators a few years ago. The underlying suggestion is the potential for a lot more downside and uncertainty cannot be underestimated.
Maybe there is one way to find out where the "new" Telstra fits in, once that 15.5c disappears from today's share price.