Why has Telstra tanked? Is it a good time to buy, or sell?

Why has Telstra tanked?

For so long, Telstra has been a Market Darling … a great dividend-paying share, almost like the world's best term deposit…but what has happened? They are out of favour with investors for the past 3 (or so) years…

What has gone wrong:

1. Telstra has warned investors to brace for a profit level at the lower end of its guidance range, but remains committed to a 22-cent total dividend payment.
2. Telstra has blamed "challenging trading conditions" for a pre-tax and interest profit that is now expected to come in at the bottom end of a previously stated $10.1-$10.6 billion range.

CEOs and price - History:

1. Ziggy Switkowski – 1999 to 2004 – Oversaw the transition from government sector to privately owned, started in 1997. Went from $9 to $5.
2. Sol Trujilo – 1/7/05
   • Went from $5 to $3.5 in his first year
   • Back to $4.8 the next year, then down to $4.2 the next year
   • Just before he left - $3
3. David Thoedy – May 2009
   • From a price of $3, it went to around $2.50 18 months later (at a low), but from there it rose to $6.50 at the start of 2015 – 5 years of positive gains
4. Andy Penn – April 2015
   • Dropped from $6.60 to $2.70
   • 2016 Aug – momentum has been on the oversold side

Sentiment

1. Competition - last 12 months alone - facing a fourth network operator entrant in mobile, an increasing number of MVNOs [mobile virtual network operators — basically companies that provide services through another telco's network]
2. NBN – The Delays are having a negative effect on expected earnings
3. Aggressively cut costs, with "core fixed costs" expected to decline around 7 per cent this financial year, with about $300 million in restructuring costs.
4. Telstra is ramping up its capital spending on new technology, especially its 5G mobile rollout – 2016 – Announced $3bn in capex (capital expenditure)
5. Fines - $10m of fines, but that is nothing
6. Outages – Few outages nationally in the past few months

Financial metrics were near the bottom end of targets

1. Revenue expected to be around the middle of the $27.6-$29.5 billion range
2. Free cash flow near the top, or even above, its $4.2-4.7 billion guidance.
3. Big one: The decrease of dividends
   • Raised Dividends, then cut by 30%!
   • Earnings per share (EPS): Average about 32c per share for 10 years
   • 2018: 29.3 EPS, 22 dividends per share (DPS) – 75% dividend payout ratio (DPR)
   • 2019 – 27.5 EPS, 18.3 DPS – 66% DPR
   • 2020 – 25 EPS, 22 DPS – 88% DPR
   • History has been about 90% DPR

The fundamentals

1. Price/earnings ratio (PE ratio) – 8.99 – But what is the future earnings versus current prices?
   • 2019 – 9.8 PE
   • 2020 – 10.8 PE
2. Yield – 10.1% plus FCs
3. Income Coverage 8.96, Debt/Equity – 118.9%
4. Financials – We are back to revenues of 2011

How much of the price is moved by fundamentals – very little! It's really our response to the drop in dividend payments which has created such a massive decline in the price itself.

1. Telstra are in and out of favour with the market
   • Is it overhyped?
2. They need to turn themselves around in terms of management decisions go, because their success lays in what they are spending the capital expenditure on
3. They are a decent term deposit – Though the price could go down more
   • Will it ever grow again?
   • Competition – Telstra still have a pretty decent market share and are semi protected through regulations