Rudi’s View: Telstra’s Premium Under Scrutiny

Rudi's View | 10:00 AM

SpaceX is looking to invade Australian telecom skies. Should Telstra shareholders be worried?

By Rudi Filapek-Vandyck, Editor

Last week, we let you down, and I am sorry for that.

Usually, its up to Telstra's ((TLS)) competitors to wear the cloak of humility and address shareholders and/or customers, but this week it was Telstra chief executive officer Vicki Brady's turn.

Telstra shareholders could be forgiven for dismissing last week's operational hiccup as simply another storm in a teacup, but public sentiment is shifting in Australia, and outages like the one experienced last week can easily become the next trigger for a more pervasive government response.

After all, telecommunication in today's modern society is nothing less than critical infrastructure for just about all stakeholders. Not being able to call Triple Zero when disaster strikes is not something any of us wants to confront.

In times of rising populism, and with pressure from One Nation in particular, governments want to be seen as doing the right thing.

The problem for Telstra shareholders is that ideas currently being floated to avoid a repeat, such as mandatory roaming for all mobile phone users, not only translate into additional costs, but could also undermine the telco's premium market positioning.

Were the latter to occur, questions would be raised about the telco's valuation, which currently sits at a premium to similar yield providers on the ASX, including two of the big four banks, ANZ Bank ((ANZ)) and Westpac ((WBC)).

A Solidly Growing Payout

At Telstra's current share price of around $5, the implied forward-looking yield is 4.3%, with consensus forecasting a 21.7c payout next financial year.

This essentially indicates the telco is expected to continue increasing its annual payout to shareholders, in line with the past four years.

Prior to that turnaround, Telstra was the prime example of a badly run company that had become both a dividend trap and a value trap, as illustrated by its inability to maintain dividends and the resulting negative underlying trend in its share price.

Those who gave the new CEO the benefit of the doubt in late 2022 have reaped plenty of rewards.

Shareholders have enjoyed steadily increasing annual dividends since FY22, while Telstra's share price has simultaneously re-rated from around $2.60 to $5.55 earlier this year.

That turnaround is also evidence of a major shift in investors' perception of the company, which is now seen as a reliable, solid generator of abundant cash flows that allow for annual increases in shareholder payouts.