Very interesting article from The Australian, outlining long...

Very interesting article from The Australian, outlining long term prospects for Telstra.. Looking very good..

Telstra likely to increase dividend as sweetener for shareholders MARTIN COLLINS: John Durie From: The Australian February 06, 2010 12:00AM

If Telstra boss David Thodey is to impress the market next week, it will be by way of a bigger than expected dividend increase, as sales will be flat, profits will be marginally lower and national broadband network news will come later rather than sooner.

Worse, when Thodey presents his interim profit numbers they will show clearly the company is being taken to the cleaners by competitors such as Optus, losing market share across the board.

This is indeed a stark contrast from the telco's history, built on either a natural monopoly, or arrogance personified in the McGauchie-Trujillo era, when prices were kept too high based on claimed superior service, leaving competitors room to drive trucks through.

Thodey has arrived at the right time, as a change in substance as well as style is needed.

His emphasis on customer service is but step one in the process, and here again Optus is already on the same road, arguably some way ahead.

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Telstra, of course, is a behemoth with $25.4 billion in annual sales and a market stranglehold and so is well positioned to bounce back.

The sweetener for shareholders is likely to be a dividend increase of 1c-15c per share, which while not huge will be the first hike in dividends since 2005.

The company's price cuts can be read several ways -- most positively as a sign it has put its technology transformation issues behind it and is ready to fire.

Talks on the national broadband network are proceeding apace, but February 22 looms as a likely deadline, that being the day the government is due to re-present its planned Telstra bill to parliament.

Both sides are hoping to get a substantive agreement in place and announced on or before that date, which will of course also mean that changes can be made to the bill to minimise shareholder fears.

The agreement will centre on basic principles, starting with the NBN sharing Telstra's copper wire ducts, carrying the fibre next to the copper, a deal to migrate customers to the NBN, and compensation to Telstra for both.

The plan is to put those details to shareholders in the second half of the year.

Ironically, the Future Fund's escrow on the stock will expire on February 23, a day after the legislation is due to go to parliament, by which time broad details of the agreement will be known.

The fund sits on 10.9 per cent of Telstra in a stake worth $4.4bn, but will almost certainly cut it substantially sometime after February 23.

Macquarie Bank and UBS are advising Telstra in the broadband network talks, with Goldman advising the NBN Co.

The only five-year guidance of the Trujillo era that has remained untouched is the commitment to generate $6bn in cashflow this financial year, and that will be met, serving as the basis for some sort of capital management by the company.

The small increases in dividend will be step one, since the fine details of the NBN compensation payments are still to be worked out, which means full-year profit should result in a more expansive suite of capital management offers.

A figure of $43bn is cited as the cost of the NBN, but this is inflated by 20 per cent increases to cover any problems and is a cumulative cost over eight years, as opposed to a net present valuation. The actual value of the project is something closer to the $33bn-$35bn range, but Telstra's compensation will be lower.

Christian Guerra of Goldman Sachs values the company's copper assets at $20bn, including so-called passive infrastructure such as the ducts at $12bn.

The government compensation will then cover renting space, customer migration and arguably payment for the redundant copper network.

It will be closer to half the $34bn cost of the network, and just how much comes by way of cash or equity remains to be seen. RBS's Ian Martin expects the half-year profit to be 1.8 per cent lower than last year's, at about $1.88bn, with sales also down.

The company will present the latest half-year as the low water mark, with upside to come, assuming the economy maintains some growth.

Doomsayers notwithstanding, the national broadband network presents genuine upside for Telstra, and of course Communications Minister Stephen Conroy has ensured this upside will also benefit consumers.

Jarrett on board