Telstra announced today that the government has shut them out of the national broadband network tender process. Investor panicked by the news and sold Telstra down 0.480 (11.62%) to $3.65, it’s lowest price in over two years. That is a huge move for Telstra and it was on massive volume of almost four times the average daily volume.

My initial reaction is this is presents a great opportunity to buy Telstra or the cheap. However, as the volume and selling increased in the afternoon, it would be prudent to wait and see if even cheaper prices are forthcoming.

Time to blow my own horn, before taking a quick look at the current situation. Five weeks ago with Telstra around $4.20 I suggested people should be selling. I posted the following on Hot Copper.

I’m fascinated by the recent thread on Telstra going to $5.45 and the thought that people would be buying Telstra now. I own Telstra, but have been selling recently to buy better bargains. Every new company I look at seems to have a better reward/risk profile than Telstra so I wonder why you’re buying. Telstra is a defensive stock, the time to go defensive was last year.
Saying this I still hold Telstra stock as the dividend and the strength make it a better place for money than the bank. However, I am a net seller.
So why are people buying a defensive issue when bargains abound?
The dividend is good. How likely is it to grow?

I was a lone voice at that time and was quickly shouted down. I also announced that I was trimming Telstra here in early November. Clearly the bank would have been a better place than my remaining shares, but hey it hard to predict the madness of crowds.

I posted the following in the Yahoo TLS board in June 2006 when people were talking about shorting Telstra at $3.69. I think it is worth repeating now.

ICSIA Timing Systems

“A huge number of investors think they are buy-and-holders, but in fact they use a peculiar form of market timing that we have described before, the ICSIA or “I can’t stand it anymore” timing system. Though this is probably the most widely used timing system in the world, we don’t recommend it. It relies on emotional reactions to market fluctuations. After a long period of market gains, this system induces many of its followers to finally jump into the market, usually against their better judgment, when they can no longer stand to sit on the sidelines watching other people making what looks like “easy money.” When the market’s in decline, this irrational system prompts its followers to remain invested, even as they continue to lose money, until they cannot stand the losses any more – and then to bail out when prices are very depressed.”
I can’t remember where I copied that from originally, but it sure is worth internalising.

I invest for the future not the past. Yes at $8 Telstra was an obvious short sale, but at today’s close [June 2006] of $3.69 you would have to be mad to short.
Lets see there will be that 20 cent dividend coming along, followed by 11 – 14 cents 6 months after that. You’ll be busy paying carrying costs and dividends in the hope that Telstra can fall even further. Good luck with that strategy.

Telstra are accelerating their sign-ups for broadband. They will reach an agreement with the regulator. They are rolling out wireless broadband. Sensis is growing. Fixed line is diminishing, but very profitable.
Even if dividend drops temporarily to 11 cents a half that is a 8.2% yield or if held within a SMSF a 9.4% yield. That will be a good return for a year or two until their problems are all sorted. If at the end of two years the dividend is stable or back to 14 cents then the market should have Telstra on a yield of around 6.5%, or a share price of around 4.30. That’s a further 8% annual capital appreciation. If yield is 6% or dividend up to 15 cents then price will be over 4.60. Hell why not add some irrational exuberance as Mr Market gets all excited about the prospects of Telstra delivering streaming media and 5.00 quickly comes in to play. Yeah I know calm down mate, lets just aim for that 4.30 in two years and sit happy with a 17% annual return.

Anyone could have easily booked those returns plus the fantastic bonus of T3 shares. As I said I sold some, but not all my shares.

I now need to go back and read the latest presentations on the transformation and assess the current situation. For anyone still reading I’ll say this:

• At $3.65 the current annual Telstra dividend of $0.28 is a 7.7% yield, within a SMSF that grosses up to around an 8.8% yield.
• The transformation process is delivering results and appears to be on track.
• Was Telstra really serious about the NBN? Submitting a 13 page letter to the governments RFP makes me wonder if they were ever serious about participating.
• Telstra’s 3G network will deliver faster broadband speeds that the proposed NBN within a year.
• Telstra will be able to use the 3G to offer broadband to the lucrative metro areas while their competitors are wasting their time rolling out an outdated, outmoded cable network.
• In these uncertain times the certainty of Telstra massive free cash flow is attractive at current prices.
• Being excluded from the tender process is the best possible result for Telstra and it’s share holders.

I still have a long position in Telstra and if prices fall further will, depending on my analysis, be substantially adding to my position.

Related posts:

1. Telstra Looks Like a Strong Buy
2. Telstra Calling
3. Telstra – Stock Market Returns Inverted
4. Telstra looks like a great buy
5. The Alternative Telstra Media Release
6. Leucadia National Corp. (LUK) Better Than Berkshire