Telstra Corp’s share price has been under pressure this year and the latest round of analysts’ reports suggests that things are not going to pick up for the big telco any time soon. The company’s dividend is also under pressure, according to some commentators
Since the start of the year Telstra’s share price has fallen 16 per cent, from a high of $5.17 to the current price of around $4.34. The current stock price is 33 per cent below the peak of $6.54 in February 2015.
Analysts put this weakness down to two causes: increasing competition in the mobile phone market and the impact of the National Broadband Network rollout.
And Telstra’s December half financial report disappointed the market, with earnings in mobile and fixed data below expectations.
Morningstar has estimated that the NBN will strip away about $2.7 billion of EBITDA (earnings before interest, tax, depreciation and amortization), hitting the company’s bottom line in a few years.
Macquarie Securities says Telstra is facing increased competition from “re-energised players” in both mobile and corporate data.
In April, TPG announced that it was entering the mobile market, having spent $1.3 billion to buy spectrum.
Macquarie says: “Mobile is Telstra’s powerhouse segment, making up 39 per cent of group revenue and 42 per cent of EBITDA. We think market share will fall from 53.5 per cent to 50 per cent over the medium term. Competitors are investing in their networks and Telstra is losing its network differentiation.”
On the NBN front, 38 per cent of premises are already “activated” and, once fully rolled out, Telstra loses control of its legacy copper network and becomes a fixed-line reseller of NBN services just like everyone else in the market.
Telstra has 45 per cent of fixed lines in Australia.
While the analysts believe Telstra has the resources to overcome these hurdles, the challenges it faces have created uncertainty about its future earnings.
Morningstar says: “TPG’s entry into the mobile market is likely to be capped, as we see limitations on the new entrant snaring any more than a 10 per cent share of the subscriber market. TPG’s ambitions will be hindered by inferior network coverage.”
Morningstar says Telstra can realise $1 billion of productivity gains by simplifying products and processes, better managing supplier relationships and making staff cuts.
“We still view Telstra as a large, bureaucratic organisation, ripe for further material operating efficiency improvements,” it says.
On the new investment front, Morningstar says Telstra has the scope to produce $650 million of additional EBITDA from the digitisation of functions across customer service, platform management and general operations.
And potential new businesses under Telstra’s umbrella include home connectivity, internet of things, delivery of health services, online services for business and intelligent video.
“The company has been through this before. It was able to overcome the loss of more than $3 billion of EBITDA from the decline in fixed line use and the sale of its Sensis business,” Morningstar says.
Macquarie also sees positives for Telstra. In the mobile market, segment growth is likely to offset loss of share
An issue for retail shareholders is what Telstra will do with its dividend. The Australian Financial Review reported last week that fund managers and analysts are expecting the company to cut its dividend when it reports full year earnings next month.
The AFR cites a Citi report, which says Telstra will pay 31 cents a share this year and then cut it to 25 cents in 2017/18.
Citi says if there is going to be a cut, it should be bigger – 17 cents a share. Citi’s analysts would rather see earnings go towards a share buyback, which would lift earnings per share.
Telstra’s dividend yield has been a big part of the stock’s attraction for retail investors. It has been as high as 9.6 per cent (in 2010/11) and as low as 4.9 per cent (in 2014/15) over the past 10 years.
In most years over the past decade it has been around six per cent and on a grossed-up basis (taking franking credits into account) it has been above eight per cent.