As both sides of the political divide bicker about whose broadband plan is better, Telstra remains comfortably placed on neutral ground and will benefit from either version of the National Broadband Network post the September election.
A very important outcome of the NBN deal announced in June 2011 was that Telstra would have significant shareholder protection from any future changes to the NBN. In effect, it removed the political risk from Telstra’s share price that had overhung the company for several years.
Now that the Coalition has announced its plan to modify the already started NBN, investors will have a better idea of the implications for Telstra under each scenario.
In our view, the outlook for Telstra is relatively unchanged under either model.
If the Coalition model is invoked after the election, the biggest impact on the NBN will be the change to a fibre-to-the-node (FTTN) rollout. If that change resulted in a faster migration of Telstra customers to the NBN, then Telstra will receive more of the migration payments earlier.
Additionally, if the Coalition model enabled the pricing of broadband to be more competitive, then this would also accelerate the take-up rate with similar consequences for Telstra.
Under the Labor plan, Telstra has already agreed a set of conditions that provide some significant protection for Telstra’s shareholders if, for whatever reason, the NBN rollout is impeded. Among the factors is a payment of $500 million to Telstra if the NBN rollout ceases after 20% of homes are passed.
It seems clear to us that Telstra’s outlook is relatively unaffected by any potential changes to the NBN regardless of who is in government after the election.
It is worth noting that the Coalition has promised to undertake a strategic review of the NBN as it exists. The Productivity Commission will also be asked to conduct the cost-benefit analysis of the project that should really have been done before the first fibre was unfurled.
One of the biggest benefits from Telstra’s point of view was the boost to its cash flow over the next few years. Subject to the pace of the NBN rollout, the company is expecting to generate up to $3 billion in excess capital in the next three years.
With that in mind, Telstra’s preferred strategy is to build up sufficient franking credits in the intervening period and then consider increasing its dividend, possibly from FY15.
Looking back at Telstra’s track record of free cash flow management over the last 11 years, the company has paid $39.4 billion in dividends.
Over the same period, Telstra has invested $44.1 billion in its business – a figure that is curiously similar to the anticipated total investment of the NBN over its 10-year build.
It should also be noted that Telstra’s free cash flow forecasts already take into account an allowance for future spectrum payments and acquisitions although it has not specified its assumptions in this regard.
Capital expenditure, including spectrum payments, can be kept within 15% of total sales.
Telstra can maintain a single-A credit rating to ensure that its dividends are fully franked and it is unlikely to need to borrow money to pay its dividend.
As a dividend stock, it’s very hard to find fault with Telstra as a candidate. The fully franked yield of 8.8% in FY13 outstrips the bank sector at an average 8.0%. As a “tight 5” group of stocks, to borrow a rugby union term, this group is hard to go past.