Since the start of November, the newspapers have been full of stories about how the wealthy are snapping up shares in the Telstra 3 sell-off.
If true, then we’re about to see a significant transfer of wealth from the rich to the Federal Government in the not too distant future.
We’ve looked at the Telstra share offer from top to bottom, inside and out, and there’s no free meal in it for the wealthy or anyone else. Sure, there are one or two sweeteners but they barely make an impact on the swag of negatives.
So before you rush off to sign on the dotted line, consider the following.
1. Telstra’s earnings prospects are uninspiring at best
Although Telstra generates a reasonable return on equity, its profits have been going sideways in dollar terms for the last eight years. That largely explains why the stock has provided shareholders with a near-zero total return during this period.
Telstra’s biggest problem is that its high margin, fixed line business is continuing to lose customers and none of its ‘high calorie’ new wave businesses have enough momentum to pick up the slack.
While Telstra’s management have a transformation strategy in place, it will take years to bear fruit. The company’s own earnings projections are for growth of 2.0% to 2.5% until 2010. That’s probably four years of not matching the inflation rate!
2. Broking analysts don’t like the stock
Even with $37 million of commission incentives on offer, only one-in-five brokers has Telstra rated as a buy. Around half have the stock listed as a hold and the rest are sells.
3. The dividend is an illusion
Much has been said about Telstra’s proposed 28 cent dividend but this yield is totally phoney, if you’ll pardon the pun. It might be tempting for income seeking investors but it is not genuine or sustainable.
Unlike a true dividend, the money isn’t being paid out of current year earnings. It’s coming out of the company’s capital. Telstra has been doing this for years now to keep small investors and the Federal Government placated but it can’t keep using cash flow to prop up the dividend indefinitely.
If you are thinking of taking up this issue, don’t bank on any seeing much upside over the next few years.
