Telstra proceeds with caution

Countryman

Finally, the Australian share market has shown some resilience, not following the weakness of the US and international share markets.

For months, there has been widespread investor frustration about the ASX not tracking the upside of the DOW, but this week, not many investors have called to ask me, why we are not following the falls? It is further confirmation of the power shift towards China and Asia in regards to our markets.

There have been several news items for investors to sift through since the last Taking Stock, including quarterly production reports from major mining companies BHP, RIO and FMG and the long-awaited Telstra (TLS) capital management briefing.

The briefing was to shed light on what Telstra is planning to do with the mountains of cash it will receive through the National Broadband Network (NBN).

The mining companies were basically in line with expectations, however, the TLS meeting came with a few interesting outcomes.

Investors have speculated that TLS would announce a share buyback, but TLS boss David Thodey and his board have decided to take a conservative approach on capital by declining both the buyback and an immediate dividend increase.

Initially, it was thought this could potentially put pressure on the share price, which had a small dip before rallying. Towards the end of the week, it was trading only just short of its recent highs at $3.40.

Despite TLS confirming it would have excess cash as a consequence of its $11 billion national broadband deal, chief financial officer Andrew Penn said the company did not expect to increase dividends until 2014, because it would not have the franking capacity until then. He said that was the preferred strategy to return capital to shareholders.

In terms of the buyback at this stage, it would be unable to complete one large enough to make a material difference to its overall performance or share price. Given that in 2013, the Federal election could change Government policy, the buyback would more likely be from 2014 onward, especially as the biggest payments from the NBN would not start until 2015.

The share price performance since Thursday's meeting indicates the market likes the discipline Thodey has employed to manage TLS, as he has looked beyond short-term popularity to ensure the company has the balance sheet to withstand the risks and complications that may eventuate outside its control.

The NBN rollout is already behind schedule and could be further delayed, which could, in turn, impact cash flows from the NBN Co to TLS. With current polls indicating a change of government, which could mean a change of broadband policy, the conservative approach is well warranted.

At this stage, to maintain the balance sheet strength and dividend return TLS offers in a time of political and international uncertainty is a positive for the company and its shareholders for the near term and into the future.

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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