Telstra pins its profit growth hopes on 5G as full-year dividend set to drop

By Chanticleer

Feb 14, 2019 — 10.49am

Save

Share

Telstra's interim results reveal an industry suffering a squeeze on profit margins from the growing footprint of the NBN Co's wholesale broadband network and increased competition in mobiles.

Telstra's profit margins went backwards in mobile, fixed line and in network application services, which was once heralded as one of the key businesses of the future at the country's biggest telco.

Adding to the pressure on profit was the decline in the average revenue per user in fixed line retail (minus 3.4 per cent), mobile postpaid (minus 2.4 per cent) and in mobile broadband.

Telstra CEO Andy Penn says 5G should halt the decline in average revenue per mobile user. David Rowe

The half-year results were in line with previously released guidance and spot on market expectations. But the interim dividend of 8¢ a share was at the lower end of consensus forecasts.

It is almost certain the full-year dividend will be 16¢ a share, down 27 per cent on the previous full year. The market has factored in this lower dividend that gives a gross yield of about 5 per cent.

Advertisement

The important point here is that Telstra has finally reached a sustainable level of profitability with a relatively predictable dividend for at least the next two years.

Shareholders can realistically plan for an increase in dividends in 2021.

The good news for Telstra shareholders is that the company has now absorbed $1.7 billion of an estimated $3 billion in negative impact on profits from the NBN rollout. The NBN roll out is now half way completed, which means Telstra shareholders have passed the peak NBN pain point.

Chief executive Andy Penn repeated statements made earlier this year that he expects the roll out of 5G mobile technology to lead to an increase in average revenue per user.

Related

Telstra job cuts and offshoring shows lack of imagination, not immigration

By Luke Clifton

Penn is confident that Australians will be willing to pay more for a mobile technology that allows faster downloads and has the potential to replace the fixed line NBN in households.

"As we have seen with the 3G and 4G product cycles in the past, we believe we will ultimately see industry ARPU increase as we transition to 5G," Penn told analysts.

"We also hope there might be some improvement in nbn wholesale prices."

Advertisement

This second statement is a brave call given that NBN chief executive Stephen Rue is not going to willingly give up his profit margin to help a company earning 70 per cent of industry revenues.

Related

What Telstra dividend guidance will do to share price: MS

By Sarah Thompson and Anthony Macdonald

There were several bright spots in the Telstra results. The company has maintained its momentum in customer acquisition. It added 239,000 post paid mobile services in operation in the half year.

Telstra health revenue rose 50 per cent which more than offset the decline in revenue from the sale of Ooyala.

Also, Penn is delivering on his promise to dramatically cut expenses.

"Our underlying fixed costs were down $162 million in the half, with nearly $900 million of annualised cost reductions achieved since fiscal 2016," Penn said.

"We will accelerate our cost reduction program in the second half of fiscal 2019 and into fiscal 2020 and we remain on track to reach our target of reducing underlying fixed costs by $2.5 billion by fiscal 2022."

The decline in profit margins in NAS was blamed on a change in revenue mix, including a decline in NBN commercial works and the timing of recognition of costs on some large contracts.

TONY BOYD

Save

Share