Hi Benson Remember from so many posts we did and as you know I...

Hi Benson
Remember from so many posts we did and as you know I sold down to get into Lithium mining but because my wife an ex employee after 34 years I want to know what you think to what I am about to post.

TLS: Can they fund/find growth?By: Chris Batchelor Telstra (TLS) is an iconic Australian company and one of the largest companies on the ASX. This article takes a fairly narrow focus, digging deeper into the numbers without pontificating on the merits of its strategy.Telstra is one of the stocks in this year’s NAPS ANZ portfolio, and indeed was carried over from the 2023 portfolio. The Telecoms sector in Australia and New Zealand is very small, with only ten stocks and of those Telstra has consistently had the highest StockRank.The Quality score of 96 is the standout. This is on the back of respectable return on equity and return on capital numbers and a decent operating margin.The Bankruptcy Risk, measured by the Z2-score is 2.29, tipping it just into the cautious zone. This is initially surprising given the perception of Telstra as such a blue chip stock.Telstra is carrying a lot of debt with the book value of liabilities as at 31 December 2023 being $27.8 billion. This compares to the market value of equity of $42 billion. Telstra’s net gearing ratio is 99.4%.They pay out about 100% of their earnings as dividends. In fact, in the most recent half year, their dividends were higher than their earnings. This raises the question, how do they fund growth?Telstra generates a high level of operating cash flow, but profits are a lot lower due to high depreciation and amortisation expenses, which is in turn due to the high amount of capital investment required.Capital expenditure can be funded out of depreciation, in other words, the cash equivalent of the depreciation expense is invested in new assets. This effectively means they are replacement assets. Any capital expenditure for growth must be funded by raising capital, equity or debt as they retain very little of earnings.Turning to the other option for funding growth, debt, as already discussed, Telstra uses a lot of debt and continues to raise more. That said, a lot of the debt raised is simply replacing the debt that is maturing.All of which ties back into the risk profile and the bankruptcy score. Whilst the real risk of Telstra going bankrupt is negligible, the risk of needing to do a capital raise is small but not zero. Whilst they could no doubt support higher debt levels, they would not want to go too much higher. That means any significant growth investments may require additional equity capital.Of course, one way to raise additional capital would be to lower the dividends and reinvest some of those earnings into the business, but that would be highly unpopular with all those investors who hold the stock for the income stream. The potential for a dividend reduction is arguably the biggest risk with an investment in Telstra.