Telstra still offers ASX income investors a reliable dividend yield says veteran fund manager

Telstra is probably the OG dividend stock for many investors who became shareholders for the first time way back when it floated over three instalments in the 90s. Some of you reading this probably fall into that category and have faithfully held the stock through thick and thin.

And there has been plenty of each, with Telstra spending most of the noughties in the doldrums as the internet revolution created new ways of communicating (the old government owned telco got a bit left behind), only to stage a resurgence in the first half of the next decade as mobile phones and broadband became a way of everyday life.

Then there was the NBN agreement which ended the company's long and lucrative grip on the fixed-line market (what’s a fixed-line I hear you younger readers ask!?). When Andy Penn took over as CEO in 2015, he warned Telstra was facing a $3 billion annual revenue “black hole”. You can see from the chart above what happened to the share price afterwards.

Add in a big price war with rivals Optus and Co. (or two, or three, over the years since), as well as a massive company-wide-reinvention strategy commenced in 2018 which had targets set for this year nonetheless – and perhaps Telstra has turned the corner once more.

So, it’s a perfect time to check in with the business, hear the views of an expert fund manager who has a long history of covering the stock, and whose fund, as he describes, owns “a big stake” in it. Let’s hear what Hugh Giddy, Head of Investment Research at IML had to say about Telstra’s first half result and outlook.

Telstra H1 FY25 Key Metrics

• Revenue: $11.82 billion vs consensus $11.84 billion
• Underlying EBITDA: $4.25 billion vs consensus $4.18 billion
• Free cash flow: $1.08 billion vs consensus $1.01 billion
• NPAT: $1.10 billion vs consensus $1.05 billion
• Dividend: $0.095 per share fully franked, ex-dividend 26-Feb
• News / Guidance: $750 million on market share buyback, previous FY guidance reaffirmed (EBITDA of $8.5 - $8.7 billion and CAPEX of $3.2 - $3.4 billion)

What was the key takeaway from this result?

Telstra is performing in line with expectations and achieving very good cost control. Today’s strong price performance is likely consistent with the market’s view that the company has met expectations without any funny business. EBITDA was very solid, as was free cash flow. It is a solid result.

Were there any surprises in this result that you think investors need to be aware of?

I don't know if anyone was expecting a share buyback. Telstra has roughly $16 billion in debt, but their balance sheet is very strong, and their interest coverage is very strong. I think they can run with a bit of debt, the NBN restructure lease payments alone would sustain quite a lot of debt against them if they were separate.

But, yeah, the buyback is a little bit of a surprise, and that's probably part of the market's excitement with the result today. The market likes it when a company can do a share buyback and it doesn't look like they're doing anything stupid, that's a good sign.

Would you buy, hold or sell Telstra off the back of this result?

Well, in the context of us already holding quite a big stake, we would continue to hold that stake. If I didn't own it, I'd be happy to buy. I’d prefer the opening price rather than where they’re trading now, but, no, it was a good result.

It's a very, very solid company with growing earnings and with a runway to further growth. Some of that growth is going to come from intercity fibre for data centres which should make them good money. It will cost $1.6 billion, but I estimate it will deliver over $200 million p.a. extra EBIT over time, and the quoted 9 year cash payback is probably quite conservative.

If I look around the market, given what else is on offer, Telstra is perhaps a bit boring, but it's very solid. There's not much that might hurt it, so it’s definitely one for a defensive investor.

Are there any risks investors need to be aware of?

We monitor the risks all the time, because look, Telstra has been through the wringer with a price war in mobiles. But even through the worst of it, when those who prosecuted the price war weren’t making any money, Telstra still made profit.

We still have some of the lowest mobile prices in the OECD and Telstra with its very large network coverage deserves a premium. It would be understandable if our mobile prices were slightly higher than the OECD average or towards the top of the OECD averages.

It’s such a capital-intensive industry, and you can't have a great telco and invest for the future at a super bargain price – it just costs too much to build and run a network. So, we think the risk of another price war is low at the moment, and prices have recovered.

Still, pricing and competitors’ aggressive pricing strategies remain a risk, so this is the sort of thing we’re always monitoring for.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

The index is off its highs but it's still expensive. If I look across the Australian stock market there are several sectors where I think the prices are close to crazy. The banking sector is coming off, but they're still the most expensive banks in the world. It makes no sense.

A lot of our tech companies are very expensive, as are many of our retailers, like JB Hi-Fi and Wesfarmers. These companies have rerated as if they're going to grow and grow, and some of them have become very expensive.

There are pockets of value, for example, one sector that used to be premium, Healthcare, is no longer expensive relative to its growth. I think there's good value around, but you've got to dig to find it.

There are signs of a kind of overoptimistic, frothy, extended market that makes me nervous. I'm managing other people's money here, so I can't speculate. This is people's retirement savings, and I'm not prepared to make a bet that expensive can just get more and more expensive ad infinitum.