High Income Yielding Stocks or Dividend Traps – Telstra (ASX: TLS) & National Australia Bank (ASX: NAB)

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Australian Economy, Macro Economics

Telstra Corporation Ltd (ASX: TLS), a blue-chip telecom company that provides provision for telecommunications and information services, including mobiles, internet, and pay television, has lately revealed its new strategy for 2022 to beat challenges pertaining to competition from players like Optus, Vodafone and TPG Telecom. The prioritizing of mobile over everything else amongst the portfolio of Telstra’s business is clearly aimed towards challenged scenario. However, Telstra’s business is impacted considering lower average revenue per user and lower profit margins.

FY19 EBITDA guidance excluding restructuring costs of approximately $600 million is expected of $8.7 – $9.4 billion. This is in fact lower than what was earmarked for FY18. The new strategy is named as Telstra 2022 and has four main commandments to:

  • Simplifying the product offerings while simultaneously creating all digital experiences.
  • Driving better performance with a standalone infrastructure business
  • Simplifying the structure, empower people and serve customers.
  • Undertaking Portfolio management and Cost reduction program

The company’s restructuring plan was provided as the way forward, however, the market was still displeased and a share price fall of about 7% percent to quite low levels was recently seen (last five days as at June 22, 2018). The company though aims to focus on long term value despite economic consequences.

There are announcements around spending up to an additional $1 Billion in regional Australia, including delivery of more than 650 sites under the Federal Government’s Mobile Blackspot Program. From a revenue point of view, the new business – InfraCo would have revenue of around $5.5 billion and EBITDA of around $3 Billion, annually. Telstra InfraCo will be controlling assets with a book value of approximately $11 billion including ducts, pipes and fiber representing the majority of those assets. In a release to ASX, the group confirms that there is no change to its capital management framework and expects its Capex to sales ratio in the range of 16-18% in FY19. Over the medium term, Capex to sales ratio is expected to be around 14%. Further, the group re-affirmed that the dividend for FY18 will be retained at 22 cents per share, and the stock now depicts an annual dividend yield of 8.46%, which is quite high in view of the latest shortcomings.

TLS unlimited data move becomes significant as results have shown that consumers are increasingly dependent on mobile networks for connectivity and consumption. As compared to the world major telecommunication companies who are planning to launch 5G in second half of 2020 and maybe even late 2021, Telstra plans to do the same in 2019 or early 2020. The company thus hopes to save $1 Bn and handle the cost of putting resources into future technology. The strategy is built on the critical strategic investments that the company has been making through their $3 billion investment program that was laid out a little over 18 months ago. The idea is to simplify products, services and operations. Nonetheless, the above seems to be coming at the cost of slashing the number of employees and contractors by 8,000.

However, lower FY19 forecasts and dividend decisions for FY19 to be announced in FY19 only, are few concerns that make the market think of dividend slashes in the coming periods. Overall, it appears that the company may witness the pain into 2019 while the balance sheet stays resilient, but it’s to be seen how the new strategy can be a turnaround for ASX: TLS.

Another blue-chip stock that is under immense pressure in terms of dividend cuts is National Australia Bank Limited (ASX: NAB). The group is said to have a capital shortfall (as per Australian Prudential Regulatory Authority’s 2020 target), and is witnessing a weakness in balance sheet while return on equity is still a decent number around 12%. The group’s half year 2018 result was also lower than market’s expectations and now the yield showcased over 7% looks a bit high. We are watchful of this major.


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