Telstra roundtable: Focusing on the dividend a fair call

Telstra Corporation (ASX: TLS) today unveiled their much awaited capital management program. It turned out the be somewhat of a fizzer, although the shares managed to recover from an early fall to finish up 3 cents at $3.38.

Telstra expect to generate excess cash of between $2 billion and $3 billion in the next three years, subject to NBN rollout schedule and market conditions.

The company’s preference for returning capital to shareholders is via growth on franked dividends, however investors shouldn’t expect the legendary 28 cents per share dividend to increase before 2014.

A much-rumoured on-market share buyback is off the table, Telstra saying they don’t believe such a buy back would be efficient.

We asked our Foolish analysts for their quick take on the announcement…

Peter Phan (Small-cap specialist):

I don’t understand why they believe a buyback now is “inefficient” and “unwarranted”, at this level of excess capital.  We are talking $500 million here of excess capital, per annum.

Telstra shares are yielding a fully franked grossed up 11.9%.  They prefer to get less than 5% on the money markets?

Somebody please explain this to me.

Dean Morel (Motley Fool Share Advisor Investment Analyst):

I guess Telstra place more importance on maintaining financial strength and flexibility. They didn’t appear to rule it out, just not now. They probably think shares are overvalued…joking!

$500m is ‘only’ 14% of their normal dividend, and would only buy back 1.2% of shares so it may be inefficient for them to bother doing so.

Mike King (Foolish contributor):

I think Dean’s first thoughts are pretty spot on.

To do the buy-back, they’d probably want to buy back at least 5% of shares and probably closer to 10% – but don’t have the cash up front to do that. They may well believe that shares are overvalued (who knows what they really think?)

If I was Telstra, I’d use it to pay down debt – saves finance costs, which = higher profit and therefore higher earnings per share = higher share price, which benefits all shareholders.

Bruce Jackson (General Manager):

I also agree with Dean.

Scott Phillips (Investment Analyst and Feature Writer):

Hard to disagree with your concerns, Peter.

I’d like to think they were paying down debt, as Mike has suggested, which I’d prefer to an investor payout, but fear they’ll use excess cash to pursue an acquisition! A debt free company still yielding almost 12% fully franked (plus the re-direction of interest savings) would make me very happy.

It’s not the highest return per se, but neither is Buffett keeping a minimum of $20b in treasuries – the sleep at night / weather the storm benefit is worth it.

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