Have Telstra’s Management been Effective?
A picture is worth a thousand words.
or it would be if Google would let me annotate their charts with a few words. Yes Telstra’s ROE is still below 2000 levels, but it is in part because of those outrageously high returns on equity there are now so many players in the telco space. Plus we’ve had a major recession 2000-2002 and a massive transformation 2006-2009 over that time frame.
Let’s add some perspective to those numbers. The trend in ROE is up and is likely to continue up. Telstra is a capital intensive business, but due to the strength and reliability of their revenues they can access cheap debt and through effective use of that capital keep their ROE high.
The debt Telstra has taken on was not to fund dividends. As I have shown before there is only one year, 2007, when Telstra were guilty of paying out more in dividends than their free cash flow. The debt has been used to transform Telstra and while I’m not expecting large capital growth I am happy with a 10% annual after tax return which has a shot at outperforming inflation over the long term as telecommunications consumes an increasing portion of household budgets. With the added kicker of a reasonable stalwart type capital gain over a number of years.
While sovereign risk remains, Telstra’s market risk is lower than the overall market.
The returns indicate Telstra’s management have been effective. Their dominate market share, infrastructure and access to funds should see Telstra continue to provide excellent returns on shareholders equity. Over the next five years owning a core position of reliable, inflation and recession proof dividend paying investments provides a put on the market. By that I mean it is likely that after being paid 10% a year for lending my funds to Telstra I’ll be able to exchange those shares for more than I can exchange them for now.
Disclosure: Long Telstra and other telecommunication companies
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Hi Dean,
I love your site, keep it up !
“… they can access cheap debt and through effective use of that capital keep their ROE high.”
TLS had trouble placing 500m bond issue in the last week due to regulatory uncertainty and sovereign risk and the issue had to be canned. Their debt/equity is over 100%. I wonder if there maybe risk they have difficulty rolling over long term debt if the sovereign risk issue continues. This is the problem with utilities with high debt ratios and no legislated guarantee of future returns. It’s worse when there is sovereign risk of bankruptcy. The coal generators in Victoria are likely to become bankrupt and wipe out the equity holders with ETS. I suppose the market is factoring in this possibility with telstra to a lesser degree.
For me, this makes it difficult to hold telstra in large quantity and I will be a seller of some if it gets to 3.60. I can’t understand why they saddled up with more debt to pay special dividends. The way it has been handled by this and the previous government is amazingly unethical. The company should consider litigation of the current government if the legislation results in a debt meltdown. I wonder if the government can legislate against that. The whole thing is amazing to watch.
The current management is negotiating for what ? The previous management were too recalcitrant and the current ones are making up for this at arguably precisely the wrong time. The rational thing to do would have been to be concilatory with a clear limit of defending against appropriation of assets or regulatory changes that clearly strip value out of the company.
Also dean, would like your thoughts on GFF. I am starting to look into this and wondering why it is trading at PE 10 and div yield 7%
S, happy to give my thoughts on GFF if you reveal a few of your favourite company analysis sites. I’ll tell you why I ask. For US shares I have five go to sites which cover me for everything from a minute look (technical and fundamental trend) through ten minute look and lastly to the SEC, for all source documents. The only free sites I know that are worth mentioning in Australia are the asx for source documents, big charts for price and p/e trends and my Commsec account for a quick fundamental trend look; revenue, margins, profit, returns on assets and equity.
So S, or anyone what are your go to sites when analysing Australian companies?
http://bigcharts.marketwatch.com/charts/big.chart?symb=AU%3AGFF&compidx=aaaaa%3A0&ma=0&maval=9&uf=0&lf=16777216&lf2=67108864&lf3=0&type=2&size=2&state=8&sid=2174907&style=320&time=12&freq=2&comp=NO%5FSYMBOL%5FCHOSEN&nosettings=1&rand=374&mocktick=1
Hi Dean, I really like Alan Kohler and use Eureka report (eurekareport.com.au), business speculator (www.businessspectator.com.au) for general information. I usually do a google search on the stock. I also use valuecruncher for ideas : http://www.valuecruncher.com/companies?indice=3
You can customise the DCF a bit before doing your own. The value screen on valuecruncher is prone to big innaccuracy due to big earnings changes in the current year and tend to undervalue growth stocks (eg JB hi fi).
I like the comparo to other stocks though on the multiples, particularly on an international level eg :
http://www.valuecruncher.com/companies/1099
I also reckon Roger montgomery’s site is also good for an alternative view on valuation with a fundamental bias :
http://rogermontgomeryinsights.wordpress.com/
I think there might be a upgraded offer for AXA but his valuation is a reminder not to get too excited.
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