telstra results...profits down...dividends up, page-3

It will take some time to work through the detail of telstra's 1/2 year report (~120 pages of detail).

Most important of the results, however, concerned the ongoing generation of free cashflow (FCF).

In 1H02, Telstra's FCF was $1.373B.

In 1H03, it was $2.116B.

Ordinarily, this would be considered a great outcome, and easily capable of supporting an increased dividend payout regime. Unfortunately, however, this is not the case.

In order to get to the $2.116B FCF result, Telstra had to factor back in asset sales of $711M (primarily, the result of the $570M partial sale (and leaseback) of its property portfolio during 1Q03.

Adjusting the FCF results for asset sales, resulted in the following recurring FCF:
1)
in 1H02 = $1.094B (ie: after excluding $279M in asset sales);
2)
in 1H03 = $1.405B (ie after excluding $711M in asset sales); and
3)
an increase in 1H03 (on a PCP basis) of $311M (or, up 28%).

So, how did Telstra achieve this?

Primarily through:
1)
increasing OCF (ie: Operating cashflow) from $2.856B in 1H03, to $2.951B in 1H03 (ie: up $95m, PCP);
2)
reducing CAPEX from $1.662B in 1H02, to $1.528B in 1H03 (ie: down $134M, PCP); and
3)
reducing investment expenditure (ie: on associated companies, in FoxTel, etc, etc), from $100M in 1H02, to $18M in 1H03 (ie: down $82M, PCP).

In order, therefore, to increase its reported FCF, and provide a supporting basis for the Special Dividend (ie: at a cost of $386M), Telstra had to resort to:
1)
one-off asset sales, etc which invariably cannot be repeated year in, year out);
2)
and trading off the future (ie: CAPEX and investment commitments) for the present in order to provide a temporary fillip to Telstra's share price.

If, however, future competitive, business, or economic pressures lead to Telstra having to reverse this process (ie: having to increase CAPEX in both a defensive and an offensive sense), it is clear Telstra will not be able to do this, and maintain a higher dividend payout, going forward.

In other words, the price to Telstra shareholders of the temporary increase in its dividend payout risks:
1)
Telstra confirming its new found utildity status;
2)
eventually seeing its asset base marginalised (ie: through the competitive and investment efforts of others); and
3)
balancing today's needs with those which tomorrow will require an increase CAPEX /payment commitment (ie: Reach, FoxTel, TelstraSaturn, broadband, etc).

If Telstra can get this balance right, then the Company will always be one step ahead of the pack. But, if not, then Telstra has just ceded an additional time delay advantage to its competitors (ie: it has fallen further back in its planning for the race of tomorrow).

I am not, therefore, convinced that Telstra has the right balance in place to correctly judge this. Time, will tell. But, for now, the jury is still out.