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Why I sold Telstra: Macquarie’s Branwhite
Published 30 September 2013

Tanya Branwhite, head of strategy research at Macquarie Securities Group, says that while Telstra shares still offer dividend yield, the stock is not worth owning from an equity perspective.
The valuation impact of investors’ unrelenting search for yield, combined with a dramatic shift in consumer behaviour away from fixed-line phones, has left investors with little choice but to desert Telstra shares, Macquarie Securities Group head of strategy research Tanya Branwhite says.

Once the darling of the Australian Stock Exchange thanks to its consistent growth characteristics, combined with its ability to pay generous fully franked dividends, Telstra now looks fully valued with a core business that seems set for a steady decline, she says.

Macquarie Securities Group – which runs a model portfolio replicated by Macquarie Private Wealth and disseminates its portfolio views to Macquarie Services Group (MSG) clients – fully sold out of its position in Telstra in September this year, according to Branwhite.

MSG has been lightening its stake in Telstra since March this year but still had an overweight position in the telecommunications giant at that time. MSG has completely sold its position in the stock in recent weeks, Branwhite says.

“From a yield perspective its still worth owning, but from an equity perspective you have to ask: do you get reasonable growth with that yield? I’d say not. There are better opportunities in the market now,” Branwhite told Smart Investor.

“Telstra was one of our biggest overweights and now it’s no longer in our portfolio.”

The $11.2 billion NBN Co has promised to pay Telstra might seem to be a substantial windfall for investors, but that payment only serves to mask the decline of the company’s core business and its overall growth potential, Branwhite says.

Telstra’s fixed-line network revenue fell 9.5 per cent for the 12 months to June this year as customers shifted from using a fixed line to mobiles and free web-based voice and video platforms. In its recent 2014 profit guidance the company said its total income would have single-digit growth. The recent announcement of 1100 job cuts is a reflection of the challenges Telstra has in growing its core business.

The decline of Telstra’s core business should not be surprising when there are plans offered by rival provider TPG Telecom including a fixed-line phone and broadband for $50 a month.

From a valuation perspective, the incessant search for yield by Australian investors has left Telstra with a share price that seems fully valued, Branwhite says.

In June last year MSG’s portfolio was heavily weighted towards income and defence stocks; now Branwhite is looking for opportunities with exposure to an economy she believes is now on a “long grind slow recovery”. Telstra might still pay an attractive dividend, but its limited growth prospects are enough for Branwhite to walk away from the stock.