Leading the market higher today was a stock almost no one wanted to buy days ago. Telstra Corp [ASX:TLS] climbed up 3.2% today to a high of $3.745 per share. Yet, the gain did little to soften its 27% decline year-to-date.
Let’s face it, unless you bought Telstra in 2011, the stock hasn’t been a good investment, encouraging many investors to hang on to their dividend.
In 2017, revenue and profits from continuing operations were marginally higher. Yet investors couldn’t have cared less. Making headlines was Telstra’s change to their dividend policy. After a capital allocation review, Telstra decided to drop their payout ratio from close to 100% to between 70%-90% of underlying earnings.
Telstra will still pay billions in dividends. Yet those investors who grew accustomed to Telstra’s dividend were less than pleased.
Telstra Trading at Bargain Levels?
Is today’s jump a sign?
It’s hard to say because the company is clouded by uncertainty.
They’re in an extremely competitive industry, about to lose an extremely valuable asset (their copper wire infrastructure) and their plans to securitize their NBN receipts is well and truly dead.
But Telstra does have one thing going for them. They produce a tonne of cash.
Telstra’s business is capital intensive. Meaning they spend a whole lot on maintaining and updating their physical assets. In FY17, the telco spent around $5.3 billion maintaining those assets. But they generate billions more from operations.
In the same financial year, Telstra generated $9.5 billion in cash from operations, $7.8 billion after taxes.
What will Telstra do with all this cash?
Right now Telstra needs to plug a $2.8 billion hole in revenues. With the NBN up and running, their copper wire infrastructure is as good as toast.
At the moment, Telstra uses a lot of its cash to pay down debt and payout dividends. But in the future, they’ll be using more cash to invest in cloud computing, cyber security and the Internet of Things. In their annual report, the telco also mentioned the construction of the largest subsea cable network connecting Singapore, Indonesia and Australia.
So while I’m not certain how Telstra will trend in the near future, they have the cash and opportunities to grow earnings and hopefully dividends from here.
Junior Analyst, Markets & Money
PS: Telstra was a stock to avoid in early 2000s. Now might be a good time to buy into Australia’s largest telco. Yet there are still pit falls and stocks to be warry from. Find out which five fatal stocks you should short today.