While most of the company results released during February suggest a broad improvement in earnings, there was still some dross amongst the gold with Telstra (TLS) being one of the prime examples.
At this stage, broking analysts are graciously giving the company more time to implement its turnaround strategy but the raw numbers look dismal.
- Net profit slumped 36% during the past six months and sales fell 0.5%.
- The group has a staggering $17.1 billion of debt on its balance sheet in a rising interest rate environment.
- Its debt/equity ratio is 139.8%, nearly six times the market average.
- Net tangible assets per share fell 2 cents to just 35.5 cents per share (or about one-eighth of the current share price).
- Telstra’s share of the mobile phone market is flat at 41% and its presence in the fixed line and retail broadband markets are both declining.
- The company’s guidance for the remainder of FY11 is for revenue to be ‘flattish’ and underlying earnings to post a ‘high single digit percentage decline.’
Despite this insipid performance, and the even more insipid share price, most analysts remain upbeat on Telstra. Of the eight major brokers that cover the stock, six rate it as a buy, one has it as a hold and one as a sell.
Does the emperor have clothes?
But the reasons cited for this optimism fail to ring true. Some of the commonly-quoted ones include –
- the growth of new mobile phone subscribers during the last six months,
- the steady decline in the Future Fund’s shareholding,
- the pledge to maintain its dividend at 14 cents per share until at least 2012,
- the group’s relatively high return on equity, and
- the finalisation of ‘key commercial terms’ with NBN Co.
Yet it’s hard to believe that Telstra has really changed its stripes. Much has been made of the growth of new mobile subscribers but it’s not difficult to gain new customers if you’re prepared to sacrifice profits. Although it has been the dominant player in the local market ever since deregulation in 1996, Telstra is actually earning around 30% less per share than it was ten years ago!
In the six months to 31 December 2010, the company only earned 9.6 cents per share yet has committed to paying out a dividend of 14 cents per share for another eighteen months. Using cash flow to pay the dividend is clearly unsustainable and sooner or later the Board will need to realign the dividend to a level more in keeping with its modest growth prospects.
Telstra has been a serial underperformer over the past decade with an average annual return of -0.6% per annum. Based on the latest numbers, there is scant evidence that the trend has changed.
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