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Financial Happenings Blog
Saturday, August 26 2006

At its highest Telstra traded at well over $9.00.  Today I read a columnist who suggested the final sale price of the $8 billion of Telstra to be sold in November could be as low as $3.15.

So what should prospective investors do or be thinking about right now?  The answer is not much - there will be plenty of time to gather more information about Telstra between now and the time when you have to put forward your money.

Telstra remains a huge producer of cash flow for investors.  Indeed, the dividend payments to investors are often regarded as the one thing that keeps the share price from falling even further.  The government are going to use 'installment receipts' to sell the Telstra shares.  This means that for each share about $2.00 will have to be paid up front and the rest, say $1.20, will have to be paid 18 months later.  One tactic used to support the sale will be the fact that there will be a 28 cent dividend over the first 12 months.  28 cents on a $2.00 first installment will be enthusiastically described as a '14% yield'.  How could you go wrong when the average sharemarket dividend yield is 4%?

The number one way that you can go wrong will be if they cut the dividend.  Management can and do cut dividends that are paid to shareholders.  This is not likely to happen over the first year or two, however can happen after that.  The second way that you can go wrong is that you don't take the time to understand the company and its prospects.  You need to form an opinion about the ability of the company to grow its future earnings.  I think that it is almost as simple as this:  If you think Telstra is capable of growth of 5% a year in the future, buy the company.  If you don't think it is, don't buy the company.  There is a lot of information that we will need before we can make that judgement.

If you want an example of dividends being used to prop up a float you need go no further than Australian Magnesium Corporation.  This was a start up company that many people were 'suckered' into investing in because the Government had underwritted 'pretend' dividends - that is dividends that had not come from earnings.  While Telstra is different from this, it is a massive company with a long corporate history, it is a company under pressure from regulators and competitors within the industry.

What are we most looking for over the next 3 months?  An understanding of how the regulators (the Government) and Telstra are going to be able to work together in the future.  If they can settle their differences, and form a reasonable relationship that will allow Telstra to benefit from its capital expenditure programs, the the upcoming sale of Telstra at less than $3.50 a share is worth a look.

Posted by: Scott Francis AT 01:38 am   |  Permalink   |  Email
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