Telstra announced plans to invest in its future today, and
the share price plunged more than 10 per cent.
Investors were shocked – shocked! – that a company would decide
to hold on to some profit to invest in the development of the
company, rather than showering it on shareholders.
In announcing it would cut its dividend by around 30%, Telstra
explained (emphasis added):
In adjusting the capital management framework and resetting the
dividend policy we have balanced the importance of
providing consistent returns to shareholders with the long term
sustainability of returns and strategic direction of the
We realise this is a material reduction from the historic level
of our dividend reflecting the lower payout ratio. We do not
underestimate the impact of this on our shareholders. It is for
this reason we are providing advance notice of this change and
why the Board has maintained a 31 cents per share dividend this
Owning shares, over the long-term, is a fairly reliable way to
accumulate wealth through price growth.
In Australia, it is also a very tax-effective way to earn extra
income because of the franking credits system which means
dividends aren’t counted in your personal income.
And companies do love to talk about their dividend. Take CBA,
which dedicated considerable space to celebrating its stable
dividends to shareholders in its recent annual results. “CBA
dividends are paid to more than 800,000 shareholders and to
millions more through their super funds,” it noted.
The prospect of a dividend provides support for the share prices
of companies offering attractive dividends. In some cases, such
as Telstra – a company widely held by retail investors – it has
the potential to inflate the share price because of demand from
investors seeking income.
Today’s price action suggests that premium, at least for Telstra,
is of the order of 10%.
The company has warned this might be coming. In a recent TV
interview, Telstra chairman John Mullen pretty much said as much.
[email protected]Telstra’s John Mullen: If Telstra had not paid
dividends we would have a war chest to take on competitors. MORE:
— Sky News Business (@SkyBusiness) July 18, 2017
“Boards review dividend policies all the time and we live in an
extremely changeable world at the moment,” Mullen said on Sky
News Business last month.
“It’s fascinating that the potential competitors of the future,
not the traditional Optus or Vodafone but more likely the Amazons
of the world, don’t pay a dividend.”
He went on to explain that the world’s most dominant companies
“reinvest their ever-growing cash flow into cheaper and better
products to gain market share”, said there was a “growing divide
between some of the older established companies and the newer
companies – not just because of technology but also because of
the new investor models.”
Mullen then helpfully pointed out that if Telstra hadn’t paid
dividends for 10 years then it would have “a $50 billion war
chest to take on the new competitors”.
There’s an obvious comparison here for how it can be done
It pays no dividend and barely turns a profit on its $US136
billion ($A171 billion) in revenue.
Another way of looking at that is Amazon spent $171 billion on
growing its business over the past year.
(For comparison, Telstra’s full-year revenue in 2016 was $26
billion, or for a retail example, Woolworths turned over $58
Amazon’s share price has hit record highs as revenue has soared.
This is what Mullen is referring to when he talks about “new
This table shows Amazon’s quarterly revenue growing from around
$US23 billion in to $US37 billion in the space of just three
The monster revenue growth and the N/A entries under dividends
are not unconnected. More on that later.
The enthusiasm among some investors to own stocks for the
dividend has long been a talking point in professional financial
markets circles. Of course it is a great thing to own a stock and
get paid for doing so, but the encouragement from the tax system
through franking and the investor culture of seeking dividend
stocks may be not just warping the market somewhat but also
restraining companies from growing their businesses (and the
value of their shares) more aggressively.
A culture of dividend hunger among investors also incentivises
boards and CEOS to redestribute profits rather than being forced
to spend time in forensic consideration of the smartest
investments to make for the company’s long-term prospects.
Richard Coppleson, the former Goldman Sachs equity strategist now
at Bell Potter, let rip a spectacular rant earlier this month on
the problems with investor psychology in Australia around
dividends on stocks like Telstra.
In the August 8 edition of his celebrated daily “Coppo Report”,
Coppleson revealed he had had barneys with clients about their
insistence on holding Telstra for the income. Here’s what he
Now will those (blind) Telstra bulls (at any price) finally
listen – I’ve had massive fights with (mainly
those who are “big” on income)
that the stock is going lower &
dividend could be a risk.
They argue that everyone’s on the
phone – their kids use it, the
NBN, and “Hey Coppo – you just don’t get
it you nor all those stupid instos (sorry guys you were
also included) – Ok when this took place the stock was at
$5.00 & they “pay a 31c dividend – now that puts
them of a big fat dividend yield of 6.2%”.
They go on.. “Coppo you just don’t get it do you – it’s on a
6.2% FULLY FRANKED dividend yield – so if you ”gross it
up” then it’s on a dividend Yield of 8.8% that’s vs RBA Cash Rate
of 1.5% – I love that type of
investment” (and guess what this guy also
thought the RBA was going to
cut). Ok he “loved” Telstra
back then at $5.00 & yield of 6.2%
ff (he was “piling them into his Super Fund as it was a
real “no brainer”).
well the “Dividend Yield” on Telstra today has
“ballooned” out to 7.5% ff, or grossed up 10.80% BUT the share
price has dropped from $5.00 to $4.09 a drop of -91c or a capital
loss of -18%.
So the lesson is that investors want “income” and that is
only going to increase over time.
BUT chasing a stock for its “yield” only (and
bigger the yield the more you should worry)
has never been a great strategy.
BUT having said all that Telstra will find massive buying
support anytime it gets to $4.00 as yield hungry investors look
for income. The other way to look at Telstra here at $4.09 is
that say they cut the dividend from 31c to 26c a huge 16% drop –
at 26c the stock would be on a dividend yield of 6.3% fully
franked or 9.1% grossed up.
So I’d say we have got Telstra stuck in a solid trading
band of $4.00 BUY… to $4.50 / $4.75 SELL….
(As it happens, after its initial plunge, Telstra shares have
climbed off the mat and a short time ago were trading at $3.99,
down 8% and just 1c lower than where Coppleson said it would find
Anyway, amongst other points Coppleson argues that buying a stock
for “income” has “never been a great strategy”.
This is simple. You may get a tax effective income stream but if
the share price declines over time you could lose big chunks of
capital. So the guy in Coppleson’s example loading up his super
fund with Telstra shares lost 20% of his capital. Hopefully, he
didn’t buy too much.
But he surely will not have been alone.
Perhaps this will prompt some share owners – retail investors in
particular – to reconsider why they really hold various stocks.
And perhaps Telstra’s decision to start holding on to some profit
to plan for its future might get other companies thinking about
it too, and bring some focus to boards — and from their
shareholders — in terms of what is really involved in building
successful companies with a sustainable, long-term plan.
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