Telstra Corporation Ltd (ASX: TLS), Australia's largest telco, could be about to use some of its whopping cash flows to buy back up to $2 billion worth of shares, according to one broker.
Credit Suisse analysts say Telstra will announce a $2 billion buyback next month and still leave it room to make acquisitions as it looks to expand in Asia. The analysts had not expected the telco to make any capital management moves until the 2016 financial year, when National Broadband Network (NBN) payments start rolling in.
But the analysts have changed their minds and now expect Telstra to fund the buyback with debt, which they say would take net debt to $14.7 billion. That's not a great move for shareholders. While utilities like Telstra can handle larger amounts of debt than many other companies, thanks to its consistent cash flow and defensive characteristics, rising interest rates could see net profit plunge, as interest payments rise.
That in turn would nullify any increase in earnings per share and could threaten Telstra's legendary dividend. At the current share price, the dividend equates to a fully franked dividend of 5.4%.
The company's plan to roll out a nation-wide wi-fi network, a fast growing Network Application Services (NAS) division and continued dominance in the mobile market, could deliver decent growth for shareholders, without having to resort to buybacks funded with debt.
Competitors, Optus – owned by Singapore Telecommunications Ltd (ASX: SGT), and Vodafone – part-owned by Hutchison Telecommunications Ltd (ASX: HTA) would dearly love to see Telstra run into some trouble. So far the gorilla in the telecommunications space has had it all its own way, growing mobile subscribers faster than its rivals.
As a shareholder, I'll be hoping Telstra doesn't do a share buyback and utilises its enormous cash flows to pay down debt and grow its existing businesses organically. That's a better way of delivering shareholder value.
