Telstra – The Alternatives
Of course in any historical analysis, the key question is not what did happen, but what else could have happened. What else could Telstra have done?
The counter argument seems to be that Telstra should have retained more of its cash flow to invest in improving its long term growth. But where?
As noted, the big area of investment was mobiles and in this space Telstra has to date done exceptionally well. It has market leadership in both revenue and earnings. With competition continuing to increase, there is plenty of room for Telstra to falter going forward, but if they do this won’t be due to a lack of past investment.
Where else could they have invested? Offshore? Relatively small efforts in these areas have met with mixed results. Surely investors wouldn’t want Telstra forking out large sums on geographic expansion – Phillipines mobile? Adjacent products? Surely we wouldn’t want an already complex business further stretched by major acquisitions into adjacent areas – Free to air TV? New technologies? Ooyala and Telstra health are probably enough evidence of where this strategy might have led at scale. There is a legitimate argument that more could be done to improve customer service and efficiency. This is true, but the errors on this front seem to be largely ones of execution rather than capital allocation.
I’d argue that broadly, Telstra has done what we expect companies to do when they are faced with limited high returning investment opportunities. Return the cash to shareholders and let them find the investment opportunities. Given franking credits (and the often overvalued Telstra share price), dividends has been the best way to do this.
The surprising thing about this is that for Telstra shareholders its been profitable.
Telstra Accumulated Returns
Its obvious that Telstra shareholders have done better than the share price suggests. Its just not clear how much better they have done.
The Snaphot below highlights the total return to investors who purchased shares in the inital T1 float. Like most TSR analysis, you have to make an assumption about what happens to the dividends that get paid out. The standard assumption that is made is that dividends get reinvested in the share price. Under this assumption, T1 investors have made 6.6% per annum, signifiantly underperforming the ASX 200 Accumulation Index.
However, whilst this assumption is theoretically correct and convenient for those calculating TSR, I’d argue that it is practically wrong. The whole point of the Telstra dividend policy is that Telstra don’t think they have anywhere better to invest the money. They give it back to shareholders so that they can spend or invest it ELSEWHERE. In the below analysis I’ve assumed that they invested it back into the ASX 200 rather than back into TLS. By reinvesting it at 9% pa in the index, their TSR over this period rises to 10.2%. On this basis, TLS investors have outperformed the ASX by >100bps per annum over the last 20 years. How many fund managers who have criticised Telstra could lay claim to this track record? Note that this analysis assumes net dividends. For those able to take advantage of the franking credits, returns have been even better.