Telstra Corporation (ASX: TLS) today unveiled their much awaited capital management program. It turned out the be somewhat of a fizzer, although the shares managed to recover from an early fall to finish up 3 cents at $3.38.
Telstra expect to generate excess cash of between $2 billion and $3 billion in the next three years, subject to NBN rollout schedule and market conditions.
The company's preference for returning capital to shareholders is via growth on franked dividends, however investors shouldn't expect the legendary 28 cents per share dividend to increase before 2014.
A much-rumoured on-market share buyback is off the table, Telstra saying they don't believe such a buy back would be efficient.
We asked our Foolish analysts for their quick take on the announcement…
Peter Phan (Small-cap specialist):
I don't understand why they believe a buyback now is "inefficient" and "unwarranted", at this level of excess capital. We are talking $500 million here of excess capital, per annum.
Telstra shares are yielding a fully franked grossed up 11.9%. They prefer to get less than 5% on the money markets?
Somebody please explain this to me.
Dean Morel (Motley Fool Share Advisor Investment Analyst):
I guess Telstra place more importance on maintaining financial strength and flexibility. They didn't appear to rule it out, just not now. They probably think shares are overvalued…joking!
$500m is 'only' 14% of their normal dividend, and would only buy back 1.2% of shares so it may be inefficient for them to bother doing so.
Mike King (Foolish contributor):
I think Dean's first thoughts are pretty spot on.
To do the buy-back, they'd probably want to buy back at least 5% of shares and probably closer to 10% – but don't have the cash up front to do that. They may well believe that shares are overvalued (who knows what they really think?)
If I was Telstra, I'd use it to pay down debt – saves finance costs, which = higher profit and therefore higher earnings per share = higher share price, which benefits all shareholders.
Bruce Jackson (General Manager):
I also agree with Dean.
Scott Phillips (Investment Analyst and Feature Writer):
Hard to disagree with your concerns, Peter.
I'd like to think they were paying down debt, as Mike has suggested, which I'd prefer to an investor payout, but fear they'll use excess cash to pursue an acquisition! A debt free company still yielding almost 12% fully franked (plus the re-direction of interest savings) would make me very happy.
It's not the highest return per se, but neither is Buffett keeping a minimum of $20b in treasuries – the sleep at night / weather the storm benefit is worth it.
3 more dividend paying stocks
If you're looking to diversify your portfolio, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid ASX companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
More reading
The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available.
