Telstra Corporation Limited (TLS) is a full service domestic and international telecommunications provider and is without question the dominant telco in Australia.

The company provides telephone exchange lines to homes and businesses, supplying local, long distance and international telephone calls and supplying mobile telecommunications services. TLS also provides data, internet, on-line services and directory services.

TLS has five key business segments:

 
FY12 Results

The groups’ FY12 results revealed low, but stable growth. EBITDA was $10.2 billion, a 2.1% increase on the prior year’s result on a guidance basis. Revenue over the year climbed 1.3%, to $25.4 billion.

TLS’s mobile division, which accounted for over 30% of entire group’s EBITDA, continues to be one of the company’s strongest contributors. The Mobile division reported an EBITDA of $3.12 billion, an 18.4% increase on the prior year’s result.

The group’s margins in this division also grew over the year from 33%, to an impressive 36% in FY12.

Investor day – strategy

The group’s investor day focused on the medium/long-term strategy and positioning of TLS. A few of the key points we gleamed from the presentation in regards to th core/mature business’s fixed lines, mobiles and internet:

 
The group plans to extract growth out of the less mature segments such as the Network Applications and Storage, Mobile Broadband or Foxtel.

Investor day – Decrease in Capex

A real positive announcement to come out of the investor day was the targeting of a lower capex/sales ratio.

TLS set it will target a capex/sales ratio of 14% in the medium-term, down from the 15% it has forecasts for FY13. This is most likely a result of the group’s involvement in the NBN, which is likely to be less capital intensive than its current network.

Looking ahead

TLS’s FY12 results showed the type of consistent growth we have come to expect. The investor update was a realistic approach to the business, with TLS understanding that it needs to protect its mature business rather than strive for unrealistic growth.

TLS is currently trading on a forecast yield (28c for FY13) of over 6.1%, fully franked, or 8.7% on a pre-tax basis. This yield, while not as attractive as before, is still likely to be enticing to investors given the low interest rate environment.

The aim of a lower capex/sales ratio is also good news as the high capital intensive nature of the business has always been a concern to market pundits. Overall we expect a solid result from TLS for the 1H13 and this should translate to further share price growth.

This article was distributed to our members on January 24th, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only TLS but all our current trading ideas. Simply click here and starting trading today.

Weekly Buy Recommendation: Telstra (TLS)

Telstra Corporation Limited (TLS) is a provider of telecommunications and information products and services, arguably best known as Australia’s dominant telco company.

Its principal activities are the provision of telephone lines; national local, and long distance, and international telephone calls; mobile telecommunications; data; internet and on-line; wholesale; telephone directories; and pay TV.

TLS owns a 50% stake in Foxtel while Newscorp (NWS) and Consolidated Media Holdings (CMJ) hold 25% each.

Results confirm turnaround

TLS’s 1H FY12 results showed a return to EBITDA growth after years of stagnation. EBITDA grew 3.7% to $4,750 million when compared to the $4,580 million in FY11.

Total revenue climbed by 1.1% to $12,419 million, whilst operating expenses declined 1% to $7,751 million over the same period.

One of the major earnings drivers for the company is its mobiles products; revenue was up 10.9% to $4,393 million year on year. Revenue from this product line alone makes up of one-third of TLS’ revenue.

The growth in Mobiles is impressive, especially when considering EBITDA margin of 34% was considerably higher than Optus’ 25.9% and Vodafone & Three’s 16.3%.

TLS has the only 4G network in Australia and with many new mobile phones being designed with 4G capabilities, the company can continue to experience strong growth in this market.

$11 billion NBN booty

Earlier this month TLS finalised its definitive agreements with NBN Co and the government for its participation in the NBN rollout.

The agreement will provide the company with approximately $11 billion in post-tax net present value over the long term life of the agreement.

The $11 billion includes compensation from the government for decommissioning its copper network and allowing the NBN to use some of its infrastructure.

In a strategy update on April 19^th, TLS said it expected to generate $2 – $3 billion in free cash flow over the next three years, subject to the NBN roll out schedule and market conditions.

TLS also said that it didn’t have the franking capacity to increase dividends before 2014 and that it had no immediate plans for a share buyback.

Arguably a better longer-term share price driver for a company is the implementation of a dividend increase over a buyback.

A dividend increase signals confidence in the long-term prospects of a company, and that TLS’ management has recognised this is a positive thing for shareholders.

Widening yield differential signals positive outlook

TLS is currently trading on a forecast yield (28c for FY12) of over 8.5%, fully franked. This is equivalent to 12.1% pre-tax.

TLS has been able to maintain a 28 cent per share dividend since FY07 and has forecast the same amount for FY12 and FY13.

Given the healthy sums of cash TLS is generating and following this month’s strategy update, we would anticipate a dividend increase from 2014.

When considering the next likely move in interest rates is down, we believe income-oriented investors will increasingly prefer TLS’s dividend yield over potentially lower interest rates on their savings accounts.

As such we think TLS is a stock to watch in the coming months.

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At the start of a new year traders and investors alike invariably look to the potential that the new horizon brings.

After a tumultuous 2011, this year that sentiment is even more pronounced as market participants put the last 12-months in their rear-view and look to better times ahead.

At Australian Stock Report we don’t particularly care for long dated predictions about the market as a whole – too much can change too quickly.

We are prepared however, to outline a few stocks that will make for interesting reading in 2012.

Below is a list of stocks to watch in 2012 and a brief outline as to why we think so.

QR National (ASX:QRN) / Asciano (ASX:AIO) – Both companies operate in the transportation industry and are highly leveraged to the mining sector. While they are in competition with each other, both can prosper with the mining boom likely to drive industry revenue. QRN and AIO are likely to experience strong growth from the Queensland area as the state’s coal output moves back into full swing after last year’s floods caused havoc with production.

ANZ (ASX:ANZ) – Our bank of choice is ANZ. While we can’t see an extreme decoupling in price between the big four over the next year, ANZ is our preferred exposure to this sector. ANZ has the second lowest P/E based on current earnings and has a dividend yield approaching 7%, which should provide some support for the stock at this level. The company also has the most exposure to the growing Asian region and one of the lowest exposures to the slowing domestic residential market.

BHP Billiton (ASX:BHP) / Rio Tinto (ASX:RIO) – These mining giants are poised for growth in 2012. Both companies were weighed down last year as the market factored in the effects of a possible hard landing in China. It is becoming more evident however, that any slowdown in the Chinese economy will be akin to a soft landing instead. The other factor that could buoy the mining giants is increased commodity prices due to the likely introduction of further monetary stimulus by the US Federal Reserve.

WorleyParsons (ASX:WOR) – Worley’s provides professional engineering and management services to the energy, resources and complex process industries. The company has significant leverage to the energy sector, specifically through its hydrocarbons (compounds founds in crude oil) division. The company will benefit from any oil supply/demand imbalance that drives up prices. Indeed, some analysts are predicting the price of oil will increase dramatically due to the political unrest in the Middle East. Higher oil prices will encourage the big oil companies to ramp up capital expenditure to the benefit of WOR. The company also has demonstrated an ability to land contracts with the major oil players, evidenced by its recent contract win for the Chevron project in Indonesia.

Saracen Mineral Holdings (ASX:SAR) – On the smaller side of the market, Saracen is a mid-tier WA gold producer that was added to the S&P/ASX 200 on the 28^th of December, 2011. This company has forecast gold production of between 120,000 -130,000 ounces of gold a year, which was reaffirmed in a recent update. Saracen is also trying to expand its business with $35 million of capital expenditure planned for the current financial year. The capital expenditure is substantial for a company of SAR’s size, but a strong net cash position of $58 million significantly reduces the funding risk.

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Myer Holdings (ASX:MYR) is one of Australia’s largest department store groups targeting a wide spectrum of consumers.

Myer has a national network of stores in Australia. It retails designer, national, and international fashion and apparel for men, women and children.

MYR focuses on its retail presence and execution, and also operates a consumer loyalty program.

A cloudy macroeconomic picture has been a major thorn for MYR and its retail peers in recent times.

However, the RBA’s recent rate cut could be the first sign of a near-term turnaround in the company’s fortunes.

Although MYR’s first quarter sales were weak, we see a pickup in momentum heading into 2012, which makes the stock an attractive proposition around current levels.

Confidence is key

MYR’s troubles have stemmed largely from concerns about the Australian economy, specifically the deterioration in consumer sentiment.

Consumer sentiment has remained weak for much of the past year amid global market volatility and the RBA’s hawkish stance on monetary policy.

This has prompted consumers to save more and cut back on discretionary spending, which has hit the sales of retailers such as MYR and David Jones.

However, things have improved in recent weeks, particularly with the RBA’s recent dovishness translating into an interest rate cut this month.

Consumer sentiment shot up 6.3% this month in response to the rate cut as well as the potential for further easing.

When combined with the Aussie dollar’s recent decline, the economic conditions are ripe for a near-term pickup in domestic consumer spending. This should come as a welcome relief for MYR’s sales heading into 2012.

Deflating trading conditions

Yesterday MYR reported a 3.5% fall in 1Q12 sales from a year earlier to $$681.million. On a like-for-like basis, sales were down 5.1%.

The group experienced a tough trading environment during the quarter, but nevertheless said sales were tracking expectations.  It also reaffirmed its full year forecast for flat sales and a 10% fall in net profit.

This came as a relief to the market, which had feared a worse result given the recent global economic turbulence.

The sales result came on the back of a tough FY11, in which net profit fell 3.6% to $162.7 million. Sales were also down for the year amid challenging retail conditions.

A final dividend of 11.5 cents was declared, bringing the full year dividend to 22.5 cents. Maintaining this dividend in FY12 would result in a robust yield ~9%, but even if the group cuts its dividend by 10% (20.25 cents), it would still deliver a healthy yield of ~8%.

Just how valuable?

Despite MYR’s weak 1Q12, we expect an improvement in sales heading into Christmas as consumers take advantage of the recent rate cut.

Unless Europe’s debt crisis intensifies, the rate cut may also prompt consumers to release pent up demand in 2012, which we see as underpinning a sales recovery for MYR.

Heading into FY13, we see a rebound in both earnings and sales for MYR as the Australian economy gathers steam due to the mining boom.

Myer is currently trading at a deep discount to its rivals, given the poor earnings expectation for FY12.  The group’s current P/E of just 8.9x represents a ~30% discount to its industry average.

However we believe the discount is too deep given the company’s relatively stronger leverage to improving consumer sentiment.

Adjusting the discount to 15%, and using a blended EPS spread over FY12, FY13 and FY14, our fundamental-based price target for MYR is $2.77, which represents good value around current levels.

Outlook

Aussie retailers have been out of favour for a while due to cyclical issues (tough economy) and more serious structural problems (strong AUD and online competition).

Whilst we are cautious on retailers as whole due to those structural issues, there is finally some value in the sector given the potential for an improvement in trading conditions.

The RBA’s recent rate cut could prompt consumers to release pent-up demand, which we believe will benefit retailers with strong operational leverage such as MYR.

Although the group’s first quarter sales were weak, we see a pickup in momentum heading into 2012.

Adjusting MYR’s deep discount to its peers, we have a price target of $2.77, which offers decent value at the current share price, particularly when factoring the healthy dividend yield.

If MYR keeps picking up momentum it will be a stock to watch right into the new year.

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Telstra (TLS) is a provider of telecommunications and information products and services, arguably best known as Australia’s dominant telco company.

Its principal activities are the provision of telephone lines; national local, and long distance, and international telephone calls; mobile telecommunications; data; internet and on-line; wholesale; telephone directories; and pay TV.

TLS has historically been considered among the blue-chip stocks due to its market cap and generally high dividend yield.

However, recent troubles have seen TLS become one of the shares to sell.  Its stock price has sunk to all-time lows as speculation mounts that poor earnings are likely to see its dividend cut.

On 29 September, TLS reiterated its FY11 earnings guidance, stating that it still expects revenue to be flattish and that it will comfortably be able to fund a 28 cent dividend.

TLS plans to spend $1 billion in order to grow its market share and improve customer service – a strategy designed to reinvigorate revenue growth.

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The dividend yield is another important concept in deciding how to buy stocks.

The dividend yield is defined as the dividend per share as a percentage of the share price, and is an important metric in deciding which are good dividend paying stocks.

Resource stocks generally tend to have the lowest dividend yields.  This is because most miners are in an expansion phase, and as such use their profits to re-invest back into the business.

Stable industries like the financial sector, and many real estate companies, tend to have the higher dividend yields.

Some of the leading dividend yield stocks are

Hastings Diversified Fund which is an infrastructure fund with some gas transmission assets. Its dividend yield is 9.7%.

Telstra is still up there but its share price continues to take a beating. We don’t feel its dividend payments are sustainable at 9.6%, given that earnings aren’t expected to grow any time soon.

Tattersalls and Tabcorp are also up there paying over 8% dividend yield.

Stockland is one of our preferred ones, currently has a yield of 6.7%.

Among the big banks, National Bank is leading the way with a yield of 5.5% while Westpac, ANZ and Commonwealth Bank are around 4.3%.

BHP Billiton has a yield of around 2.6%.

A final point to consider in deciding how to buy stocks, is that shares may have high dividend yields because their price has sunk so low.

A company whose dividends are falling at a slower rate than the decline in their share price, will actually see their dividend yield rise.  Consequently, the returns from dividend payments are offset by a declining share price, so the investor ends up losing out on a stock with a higher dividend yield.

When considering how to buy shares, attention must be paid to the stock’s dividends.

Dividends are a share of company profits that are paid to stockholders of the underlying company.

They are usually paid twice a year on a ‘per share’ basis.  Dividends differ to fixed-interest payments in that the decision to pay the dividend, and the amount, are at the discretion of the company’s directors.

Dividends are indeed at a historical low. The global financial crisis hurt the profitability of many companies, and dividends fell in line with profits.  As profits fell, companies increasingly focused on preserving capital and reinvesting in the business rather than returning capital to shareholders.

Whether dividends are important or not depends on the nature of the investor.

Often you will find that high growth companies will not pay dividends, as they tend to re-invest their excess profits to continue their growth.

These stocks will typically have a rising share price, so there is little incentive for the business to pay shareholders who are already benefiting from owning the stock additional cash.

The more aggressive investors tend to favour low dividend/high growth stocks, as they consider the growth potential of the stock to be a greater source of return than dividends.

However, companies with good dividend yield tend to offer investors security and confidence in the business and also benefit from dividend re-investment.  Mature companies with stable profits tend to pay the highest dividends.  This is because they have less of a need to preserve their capital.

The more conservative investors may prefer the income security that dividends provide, as opposed to the capital appreciation potential of the underlying stock.