Points to ponder over Telstra’s share buyback
Sykes
Trevor Sykes
Whether investors accept the present buyback offer by Telstra really depends on their view of the company’s prospects. As there is nothing certain about the buyback and the future is by no means clear, that’s no easy decision.
Let’s look first at the terms of the buyback, which is the modern equivalent of buying a pig in a poke. Telstra has given itself a wide range of options, including not buying back any shares at all.
On the eve of the buyback announcement, Telstra shares were $5.60, down from their height of $6.19 in January.
Telstra’s share buyback booklet gives shareholders the option of offering to sell their shares at any discount from 6 to 14 per cent below the VWAP (volume weighted average price) for the five days before September 30.
Alternatively, shareholders can just sign up to accept the final determined price. Even then, it is not certain all your shares will be accepted unless you are a small shareholder with 350 shares or fewer.
As a disclosure, the writer holds Telstra shares and only proposes to accept for one, rather irritating, small shareholding.
The proposal is that Telstra will buy back shares at VWAP, which will comprise $1.78 capital and the balance as a fully franked dividend. The Telstra booklet provides an example of outcomes for various shareholders.
Page 19 of the booklet shows that if the VWAP were $5.60, a non-pensionpaying super fund would receive a benefit of 21¢ a share and individual shareholders would have a loss of 7¢ or a profit of up to 87¢ depending on their income levels, people with incomes of $180,000 or more being the largest beneficiaries.
In that calculation all parties are assumed to be able to take full advantage of the capital loss, which in the example works out as $1.44 per share. If anyone can’t, then the advantage of participating becomes pretty marginal.
The real question is whether shareholders should ignore the buyback on the grounds the company will prove a good bet. That’s quite a vexed question too.
On its financials, Telstra looks OK. In the fast-moving worlds of IT and telecommunications, my preference is to concentrate on cash flow. In FY16 Telstra’s operating cash flow was $8.1 billion after tax, a shade down on the previous year’s $8.3 billion. Investing cash flow and capital expenditures absorbed $2.2 billion, down from $6.2 billion previously.
Unfortunately, telecommunication firms have to keep spending to stay abreast of rivals in both infrastructure and software. Investors just have to pray they make the right choices.
Subtracting the investing cash flow from the operating gave Telstra $5.9 billion cash surplus last year, of which $3.8 billion was paid in dividends.
So why are they spending an estimated $1.5 billion on this buyback? I don’t think they should. They live in a challenging world and are planning capital expenditure totalling $3 billion over the next three years.
Telstra’s booklet says it’s buying back the shares as part of a capital management program. That’s always difficult to believe when a company is simultaneously running a dividend reinvestment plan.
Telstra’s franking credits now stand at $392 million and the buyback will rip out an estimated $375 million, so it would have been much fairer to pay a special dividend to everyone.
If you don’t like Telstra’s future, accept the buyback and get out of what you can.
I intend to hang in for a bit yet. Part of Telstra’s plan is to buy back shares on market at unspecified prices (they give themselves a lot of optional room) from October 3 this year to August 11, 2017. So that should put some sort of floor under the share price for nearly a year.
Trevor Sykes is not a licensed investment adviser. Opinions expressed in this column are not a substitute for tailored investment advice.
Telstra has given itself a wide range of buyback options. PHOTO: LOUIE DOUVIS
(20min delay)