Telstra, the big Australian Telecom, and one of the great dividend stalwards of the ASX over the past 10 year. A dividend that was seen as reliable as the sun rising in the morning – until recently…
Poor Telstra shareholders have been suffering over the past few years. The share price was up around $6.50 around 2 ½ years ago, and has been sliding all the way down to around $3.50 in recent times.
It’s not screamingly cheap at the moment, but at this price it definitely deserves a place in a Fully-Franked dividend Fund. I’d love to buy a few more shares at a cheaper price, so I’m starting with a smaller allocation of around 1,000 shares. At a price of $3.61 (closing price 17 January), this is a total cost of $3,610.
Almost anyone who has been exposed to the Australian stock market probably knows about Telstra, or uses its services. It’s primarily a telecommunications company, but sees itself as more of a ‘world-class’ technology company. This is probably more aspirational at this stage, but there’s certainly plenty of opportunity for the business if it does the right things. But we won’t go into too much detail about the company – that dividend is what we really want to focus on for Telstra…
At this price, the Fully-Franked dividend yield is around 8.7% based on next years reduced dividend of $0.22. This was a pretty dramatic cut from the steady levels of between $0.28 and $0.31 over the past 10 years – so what happened?
Over this time, Telstra has paid out nearly all of its earnings as dividends, around 90% on average. It hasn’t reinvested much in trying to grow the business, and the results is a pretty lacklustre growth in earnings:
But today, Telstra can’t afford to just keep plodding along. It needs to spend a bit more cash to enhance its networks and digital offerings for the future, and as a result, has cut its dividend for the first time in over 10 years. Fair to say the market has not been happy!
At this price, the upside certainly looks much better than the downside. Telstra can comfortably generate the cash required to pay this much lower dividend for years to come, and if some of that new investment pays off, the dividend would likely start growing again.
And the shares are relatively cheap…
Telstra’s P/E ratio is around 10.7x based on last year’s earnings. The average has been around 13x or 14x over the past 10 years, and value hasn’t been this low since 2010 to 2012, during which the shares hit an all-time low. A short few years later the share price had doubled – could the same happen again?
The market clearly isn’t loving Telstra and is doubting its future growth. Potential new competition from TPG Telecom in the mobile space is probably casting a shadow over the business too – but such pessimism is often an overreaction in the short term.
Enterprise Value to EBITDA ratio is currently around 5.4x, very cheap for any business of Telstra’s size, even without any growth prospects and the amount of capital the business has to spend each year.
There’s a good chunk of fixed assets in Telstra, with around $20 million of ‘communication’ assets, but like most decent businesses these days, a larger proportion of value is intangible. In the case of Telstra, there’s around $10 million on its balance sheet, with ‘the market’ pricing another $30 million of intangible value. Being the market leader in its industry, a large proportion of intangible value is to be expected.
Telstra has nearly $17 million of debt, but this balance has been more or less unchanged over the last 10 years. It makes sense for a company with plenty of fixed assets to fund some of its required capital expenditure with debt, and it has always been able to comfortably service the interest payments.
The chart opposite shows Telstra’s interest coverage ratio (a measure of how easily a company can pay the interest on its debts) over the past 10 years. Anything around the 2-3 mark is usually when it’s time to get nervous! No problems here for Telstra, and no reason this looks to change in the near term.
- A long time proven dividend payer, with a Fully-Franked yield of around 8.7%, and potential for this to improve
- A well known market leader in the Australian Telecommunications industry business, which is currently good value at a P/E ratio of around 10.7x and an EV / EBITDA multiple of 5.4x
As I said earlier, not a screaming bargain, but good value for those sure-to-be-solid Fully-Franked dividends. I’d love to add to my holding if the share price falls below the $3.40 mark or so.
While we wait for that to happen, there are a few more good Fully-Franked Fund candidates in the works…