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What will Telstra Corporation Ltd do with its $7 billion dollars?

Telstra Corporation Ltd (ASX: TLS) has added to its growing cash pile, following the telecommunications company’s announcement that it was selling 70% of its Sensis division for $454 million.

The giant telco is forecasting free-cash flow of between $4.6 billion to $5.1 billion in the 2014 financial year, and has been selling off and divesting non-core assets. In December 2013, Telstra sold its Hong Kong mobile business, CSL, for $2 billion, and also partly listed its Chinese car sales website Autohome on the New York Stock Exchange. Telstra’s 66.2% stake in Autohome is currently worth well north of $2 billion, and the company could sell down it stake even further, if the company needs to raise funds.

Analysts have speculated that Telstra could use the funds to increase its legendary 28 cent dividend, implement a share buy-back or return capital to shareholders. That’s all good news for shareholders, especially the self-managed super fund army, who especially cherish the fully-franked high dividend yield.

For others, the preference is for the company to pay down some of its $15 billion in debt. While Telstra can handle a large amount of debt, it’s current net debt/equity ratio at 102% is fairly high, and debt can place companies in situations beyond their control, as many property trusts found out during the global financial crisis.

Asian expansion on the cards?

Telstra has been keen to ramp up exposure to Asia, and recently said the Asian region represents a huge market opportunity, with its growing middle class, rapid urbanisation and strong economic growth. Rather than returning excess cash to shareholders, Telstra may be building a war chest to make an acquisition/s in Asia, to generate growth outside its main market of Australia. With mobile phones close to saturation point locally and low growth in retail broadband, the giant telco could be eyeing an offshore expansion.

The acquisition of a smaller telecoms player such as TPG Telecom (ASX: TPM), iiNet Limited (ASX: IIN) or M2 Telecommunications (ASX: MTU) can be virtually ruled out, with the Australian Competition and Consumer Commission (ACCC) likely to cite competition concerns.

Foolish takeaway

The most likely scenario is that Telstra will continue its focus on shareholders, and return capital either through a special dividend, higher dividends or a capital return. But investors shouldn’t count their chickens before they have hatched, as a major acquisition could also be on the cards.

Should you buy, sell or hold your Telstra shares?

With its legendary, fully franked 28-cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: "Is It Time to Sell Telstra?"

Motley Fool writer/analyst Mike King owns shares in Telstra, TPG Telecom and M2 Telecommunications. You can follow Mike on Twitter @TMFKinga

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