April 19 (Bloomberg) -- Telstra Corp. will hold off on returning extra cash to shareholders until at least 2014 as it starts receiving A$11 billion ($11.4 billion) from the state-owned company building Australia’s broadband network.
The nation’s largest phone company will refrain from immediately giving back as much as A$3 billion in excess cash to keep its options open, Chief Executive Officer David Thodey told a meeting of investors in Sydney today.
Telstra will get payments and benefits for handing over most of its copper telephone wires to make way for a mainly fiber-optic broadband network being built by NBN Co. at a cost of about A$36 billion. The Melbourne-based company will move from being Australia’s biggest seller of wholesale phone and data services to its biggest buyer as a result of the switch.
“We need to find new sources of profits as we get paid to decommission the copper,” said Thodey. “We must look at growth opportunities, we just must.”
That may include making acquisitions overseas, Sachin Gupta, an analyst at Nomura Holdings Inc., wrote in a note to clients after the announcement.
“Domestically, opportunities are likely to be limited,” Gupta wrote. “Telstra may look offshore for select opportunities in adjacent industries like media.”
Telstra, formerly state-owned, accounts for about 70 percent of Australia’s fixed-line broadband market, more than half its wireless broadband business, and 40 percent of its voice-based mobile-phone revenues.
The shares rose 0.9 percent to A$3.39 at the close in Sydney, its highest level since Feb. 17. The benchmark S&P/ASX 200 index gained 0.3 percent.
Telstra’s board had promised to consider capital management after completing the agreement on March 7 to spin off its copper network.
A buyback of shares wouldn’t be an efficient way of giving cash to shareholders and the company won’t have enough tax credits to increase its 28 Australian cents per share dividend before 2014, Chief Financial Officer Andrew Penn said.
It will continue paying 28 Australian cents per share in dividends through 2013, he said. The company has not raised the payout since 2005, according to data compiled by Bloomberg.
Australian companies often attach so-called franking credits to their dividends to maximize returns to local shareholders, who own about 22 percent of Telstra according to data compiled by Bloomberg.
“This is a company that’s facing significant changes in the next eight to 10 years in terms of industry structure,” Laurent Horrut, an analyst at JPMorgan Chase & Co. in Sydney, said by telephone.
Credit rating company Moody’s Investors Service said the company’s A2 rating was now stable after the announcement. Moody’s had started a review into a possible downgrade of the company’s debt last June. Both Fitch Ratings and Standard & Poor’s rate the company’s debt A, with S&P having a negative outlook.
“The NBN deal will bring substantial cash flow into Telstra which will assist to offset the loss of monopoly-like revenue streams as a result of the transaction,” Moody’s analyst Ian Lewis wrote in a note outlining the decision.
Australia’s opposition, which leads the government in opinion polls before elections due in 2013, has called for a cheaper version of the broadband network to be built that would only extend glass fibers to neighborhood connection boxes.
This so-called fiber-to-the-node model differs from the government’s preferred fiber-to-the-home plan, which will extend the highest-speed network to individual homes.
“Definitely fiber-to-the-node is faster and cheaper” to roll out, Thodey said. “If you’ve got a purist view about an ideal world, fiber-to-the-home is definitely the ultimate solution.”
Telstra is expected to spend an average of A$3.8 billion a year on capital projects in the three years through June 2014, according to the consensus of eight analysts’ estimates compiled by Bloomberg. It will average the same level of free cash flow over the period, according to the average of five analysts’ estimates.
While Telstra’s net income has fallen 0.7 percent since 2007, it has paid out an average of 97 percent of earnings in dividends over the period and its shares are currently yielding a dividend worth more than 8 percent of the stock price.
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