One of Australia's most well-known dividend shares, Telstra Corporation Ltd (ASX: TLS) is set to release its results to the market later this week. With wide ownership from fund managers, self-managed super funds, and household investors, the company is sure to be closely watched when it reports.
Here are three things you should watch for in Telstra's upcoming report:
- Business performance
Obvious, but occasionally overlooked by investors who are too focused on that juicy 5.5%, fully franked dividend. Telstra's ability to continue to pay that dividend depends on it maintaining or growing its existing businesses. The half-year report showed a minor decline in Average Revenue Per User (ARPU) for the key Mobiles segment, while declining Fixed voice (landline) customer numbers continue to drag down revenue in the Fixed product segment.
Specifically, investors will want to watch that Telstra can at least maintain ARPU and its EBITDA margins, and keep 'Churn' (the loss of customers) under control. These statistics can be found in the analyst presentation that accompanies the report and will be among the first 'smoke signals' if business conditions start to decline.
- Debt
Telstra's debt is slightly below management's ideal range, with gearing (net debt divided by net debt + equity) at 49%, below the target range of 50%-70%. Management has already stated their intention to increase the company's debt; much of this will likely go to the NBN construction and other growth avenues in the future. On a full year basis, Telstra will not borrow to fund capital returns or pay dividends, which should reassure shareholders.
(I've noted previously that readers need to examine Telstra on a full-year basis, because the company occasionally borrows to cover its expenses at the half-year.)
- Execution on priorities
A company like Telstra, which operates in both mature and growth industries, can't just throw a lure in the river and expect to catch fish. To continue the analogy, the company needs to both organise its major 'fishing fleet' while simultaneously finding the ideal spot for single boats to park in the river. Management prioritises investment needs and business opportunities, and readers need to check that the company is making progress towards these priorities.
Five key priorities management identified for 2016 were: 'Continue to consolidate our network leadership, accelerate our productivity program, win in the NBN market and reduce cost to acquire, continue to invest in long-term growth, (and) bring to life what it means to be a world class technology company.'
Great 'execution' (the way they deliver their services) is everything for Telstra, since its market dominance means that everybody wants a piece of its pie. As a result I recommend that readers follow up on all five of these priorities in the upcoming report – again, they should be covered in the accompanying analyst presentation.
The perks of owning Telstra is that its business is mostly stable and quite predictable, which is why its 5.5% dividend is such a favourite among investors. However, history is full of formerly dominant businesses that lost their way or were edged out by brighter competition – which is also why you need to keep an (admittedly, fairly lazy) eye on Telstra.
