re: telstra --- the reason it's going much lower. Grant let me...

re: telstra --- the reason it's going much lower. Grant let me give you an example of a notional company XYZ, and it's growth path:


year 0 : 7% growth in EPS

year 1 : 12% growth in EPS (a new product is released that shows great promise...potentially creating a big new market)

year 3 : 15% growth in EPS (the whole market is growing, this company's share of the new market is growing, and margins are expanding)

year 4 : 16% growth in EPS

year 5 : 17% growth in EPS

year 6 : 12% growth in EPS (a new competitor has entered the market taking market share away from the XYZ company, margins have shrunk, however, the total market is still growing, albeit at a slower pace than before)

year 7 : 6% growth in EPS (the total market is close to maturity, competition is increasing, and margins are starting to get presured)

year 8 : 2% growth in EPS (the market is moving towards maturity. The product in question is rather homogenous, thus there is little room for product differentiation. A consequence of this is increased price pressure)

year 9 : -4% growth (though market conditions are continuing, however, harsh cost cutting and process streamlining are partly offsetting the loss in revenues)



This is not an direct example of TLS's growth path, however, many aspects do apply.

I reckon TLS's somewhere between year 8 & 9 in my example.

What tihs means for TLS is little or no growth in earnings (even perhaps single digit negative growth in earnings), and a steady dividend (although in TLS's case they do have room to slightly increase the div to support the share price).

What happens when a company such as the one i've outlined has a steady if not negative growth in earnings in the short/medium term...?

Why do you think people were willing to to buy stocks yielding only 3/4% ff just a 12/18 months ago...? Because they were witnessing growth in EPS, and conequently growth in DPS.

What happens when a company such as TLS demonstrates to the market (via their earnings announcements) that their growth path in the medium term is flat at best...? People demand more income. ie. they mark the share price down untill the div yield is considered adequate enough to offset the potential lost growth in capital via little chance of future share price appreciation ( a consequence of the short/medium term EPS outlook being flat)

That's what's happening to TLS...it's moving towards being equivalent to the APA (Australian Pipeline trust). APA actually has a reasonably promising outlook in terms of EPS growth, yet they're priced for a div yield of approx 8/9% unfranked. This equates to a yield of approx 6.5/7% franked ...

Let me tell you --- i have more confidence in APA's growth outlook going forward than TLS's... so as a result of this, imho, TLS should be paying a higher yield.

What will it take for TLS to be paying a ff div of above 7%...??

I'll let you work that out....!!