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Since the start of November,
the newspapers have been full of stories about
how the wealthy are snapping up shares in the
Telstra 3 sell-off.
If true, then we're about to see a significant
transfer of wealth from the rich to the Federal
Government in the not too distant future.
We've looked at the Telstra share offer from top
to bottom, inside and out, and there's no free
meal in it for the wealthy or anyone else. Sure,
there are one or two sweeteners but they barely
make an impact on the swag of negatives.
So before you rush off to sign on the dotted line,
consider the following.
1. Telstra's earnings prospects are uninspiring
at best
Although Telstra generates a reasonable return
on equity, its profits have been going sideways
in dollar terms for the last eight years. That
largely explains why the stock has provided shareholders
with a near-zero total return during this period.
Telstra’s biggest problem is that its high margin,
fixed line business is continuing to lose customers
and none of its 'high calorie' new wave businesses
have enough momentum to pick up the slack.
While Telstra's management have a transformation
strategy in place, it will take years to bear
fruit. The company's own earnings projections
are for growth of 2.0% to 2.5% until 2010. That’s
probably four years of not matching the inflation
rate!
2. Broking analysts don’t like the stock
Even with $37 million of commission incentives
on offer, only one-in-five brokers has Telstra
rated as a buy. Around half have the stock listed
as a hold and the rest are sells.
3. The dividend is an illusion
Much has been said about Telstra's proposed 28
cent dividend but this yield is totally phoney,
if you'll pardon the pun. It might be tempting
for income seeking investors but it is not genuine
or sustainable.
Unlike a true dividend, the money isn't being
paid out of current year earnings. It's coming
out of the company's capital. Telstra has been
doing this for years now to keep small investors
and the Federal Government placated but it can't
keep using cash flow to prop up the dividend indefinitely.
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