(22 Feb 2011) - While most of the company
results released during February suggest a broad
improvement in earnings, there was still some dross
amongst the gold with Telstra (ASX:TLS) being one
of the prime examples.
At this stage, broking analysts are graciously giving
the company more time to implement its turnaround
strategy but the raw numbers look dismal.
- Net profit slumped 36% during the past six
months and sales fell 0.5%.
- The group has a staggering $17.1 billion of
debt on its balance sheet in a rising interest
rate environment..
- Its debt/equity ratio is 139.8%, nearly six
times the market average.
- Net tangible assets per share fell 2 cents
to just 35.5 cents per share (or about one-eighth
of the current share price).
- Telstra's share of the mobile phone market
is flat at 41% and its presence in the fixed
line and retail broadband markets are both declining.
- The company’s guidance
for the remainder of FY11 is for revenue to
be ‘flattish’ and underlying earnings to post
a ‘high single digit percentage decline.’
Despite this insipid performance, and the even
more insipid share price, most analysts remain
upbeat on Telstra. Of the eight major brokers
that cover the stock, six rate it as a buy, one
has it as a hold and one as a sell.
Does the emperor have clothes?
But the reasons cited for
this optimism fail to ring true. Some of the commonly-quoted
ones include -
- the growth of new mobile
phone subscribers during the last six months,
- the steady decline in the
Future Fund's shareholding,
- the pledge to maintain
its dividend at 14 cents per share until at
least 2012,
- the group's relatively
high return on equity, and
- the finalisation of 'key
commercial terms' with NBN Co.
Yet it's hard to believe that
Telstra has really changed its stripes. Much has
been made of the growth of new mobile subscribers
but it's not difficult to gain new customers if
you're prepared to sacrifice profits. Although
it has been the dominant
player in the local market ever since deregulation
in 1996, Telstra is actually earning around
30% less per share than it was ten years ago!
In the six months to 31 December
2010, the company only earned 9.6 cents per share
yet has committed to paying out a dividend of
14 cents per share for another eighteen months.
Using cash flow to pay the dividend is clearly
unsustainable and sooner or later the Board will
need to realign the dividend to a level more in
keeping with its modest growth prospects.
Telstra has been a serial underperformer over
the past decade with an average annual return
of -0.6% per annum. Based on the latest numbers,
there is scant evidence that the trend has changed.
Warning: While all care has been
taken in the preparation of this document (using
sources believed to be reliable and accurate),
we do not accept responsibility for any loss suffered
by any person arising from reliance on this information.
This document is not financial product advice
and does not take into account any individual's
objectives, financial situation or needs.
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