So keen is Telstra to maintain dividends that it is prepared to move outside its payout framework of handing back 70 per cent to 90 per cent of underlying earnings.
However, it might not or should not be a permanent solution to the longer term problem of how to compensate for damage caused to its earnings by the rollout of the NBN.
In order to keep the dividends flowing Telstra needs to earn earnings before interest, tax, depreciation and amortisation of $7.5 billion to $8.5 billion – an outcome that Mullen says Telstra is aspiring to achieve.
It will be another year to 18 months or so before shareholders will see whether aspiration meets reality.
The aspiration to cut $2.5 billion from its cost base looks safe (and this will take Telstra from the bottom to the top quartile of cost-efficiency among global peers).
But the more difficult target of landing a return on invested capital above 10 per cent by the end of the 2022 financial year now won’t be met. A return of 7 per cent looks more realistic, according to Mullen.
For that investors can blame the pincer squeeze from the two C’s – competition and COVID.
But competition is the far larger threat in the medium to long term.
The NBN has taken Telstra’s wholesale business and eaten its broadband margins. And while Telstra continues to lead strongly in mobile phones it is a mature business in Australia and has two well-funded competitors. And that previously wonderful profit bump from customers over-eating their data allowances is now a thing of the past. The early growth of 5G will be a bonus but again it’s a heavily contested market.
Telstra has had 10 years to reinvent itself as a company that can prosper. The NBN has given the telco plenty of compensation for the customers it has taken but it has taken more.
Mullen put the recurrent cost to Telstra’s profits at about $3.5 billion, when the full impact of the NBN has washed through. And over the past decade the impact of the NBN in addition to the loss of voice revenues, SMS revenues and global roaming has cut a $6 billion hole in Telstra’s profit, he says.
But for the most part it was damage that was foreseeable many years ago.
The plan from the early days was to develop more digital-based earnings streams (a technology/communications hybrid) to compensate for earnings lost to NBN. It was never going to be enough.
In subsequent years Telstra’s strategy took on a more realistic hue – a massive cost-cutting and productivity enhancing drive on the one hand and a plan on the other hand to cordon off its infrastructure assets.
Mullen updated investors on the progress of Infraco saying that by the end of the 2021 financial year (only nine months away) it would be ready to “consider monetising some of these assets”. There was no clarity on whether this would involve a de-merger or a spin-off of Infraco but there was a clear suggestion that it would involve getting involved in the eventual privatisation of the NBN.
This is the potential blue sky for Telstra but it will probably take a few years.
Elizabeth Knight comments on companies, markets and the economy.