Telstra – Stock Market Returns Inverted
The Australian stock market historically returns around 13%, comprised of roughly 10% capital growth and 3% dividends. The current yield on Telstra inverts those returns, with over a 10% after tax dividend and 3% growth.
Here are a few graphs for readers to considers.
The valuation ratios clearly show the long term decline in the price investors are prepared to pay for Telstra. They also highlight how an improved outlook could lead to a significant increase through ratio expansion. While growth is great it unfortunately usually comes at too high a cost resulting in poor returns. Investing in companies with low ratios has been shown over and over again to be a good path to investing success. The reason is ratio expansion.
Telstra received a lot of negative press in 2006 and 2007 when their payout ratio edged above 100%. Though as this chart shows Telstra generate plenty of cash to support the dividend. At current prices and yield the most important question an investor can ask is whether Telstra can maintain and over the long term increase their dividend. If you think they can then Telstra is a buy at current prices.
Clearly all is not well with Telstra and hasn’t been for some time. You simply do not get 10% yields on well managed prosperous companies. The above chart shows that despite rising gearing Telstra have not managed to eek out a corresponding rise in ROE. It’s fair to say they have had to increase their gearing to maintain their ROE.
Telecommunications is a capital intensive business. Telstra are fighting increasing competition, increasing interest rates, decreasing returns on their defined benefits fund and an insane government at a time of generational change in their business. Projecting consistent earnings into the future for a company faced with so many issues is hazardous. However, Telstra do have a very strong brand and have invested heavily in their transformation project.
I own Telstra as ballast in my portfolio. It provides a high cash flow and steadying effect in these volatile times.
Disclosure: Long Telstra
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Hi Dean, unfortunately I couldn’t stand holding telstra anymore. I bought in average price 3.14 and sold out at 3.00 after a 9 month holding period. It was the biggest loss for me this year.
I like to have a timeframe for a turnaround. I bought it on the premise that it was underpriced due to regulatory uncertainty and that this would resolve itself within 6 months and it didn’t.
In the long term I have doubts about sensis being worth much with google. Telstra have not elaborated a management plan that I found a compelling turnaround story so I sold. Perhaps it will turn around some time but it isn’t my sort of investment. I hate losing on capital and paying a high tax rate on the dividend despite the franking.
Hi Sean, if that small loss is the worst you’ve done this year then well done as I know you’ve booked some good gains. I agree Sensis has short lived value, comparable to the decline in the fixed line business.
Hi Dean, it was a small % loss but a large position, 10x my normal position in individual stocks, so it blew out the loss to the equivalent of 50% on a usual position, which is much larger than what my stoploss would be (15-20%). Just goes to show that position sizing has a big effect on loss size. A basic lesson of risk management, but one I seem to need to learn many times to really get it.
I wasn’t able to trade around the loss either, because time and again I overestimated the volitality and failed to sell out on the bounces as I thought they were too small. They were pretty small (10% over 1-4 weeks) and I kept getting the directional moves wrong on % swing, averaged down and increased the position without taking some off at a profit. Based on my record in the last 6 months on it I had no confidence I would be able to do better in the next 6 months.
Good luck in your position. Watch the risk management if it is an overweight position. You may need to be able to stomach being able to tolerate sub 2.75 prices in a gradually downtrending stock if the dividend is cut or no NBN deal is reached by late June.
Hey Sean, I view position sizing as critical, but many other investor like Mohnish Pabrai have argued intelligently that static sizing is the way to go. Their basic argument is that while they are happy selecting the best X stocks for their portfolio, as they can’t be sure which one will deliver the biggest gains then having equal sizing is the best way to go.
Like most things I see value in fusing philosophies and try to apply static sizing within categories, but allowing outsized position when I’m extra confident. Perhaps one day I’ll gain the patience to only invest when I’m extra confident.
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