Telstra announces outcomes of capital allocation strategy review

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    Thursday, 17 August 2017 – Telstra has announced the outcomes of the capital allocation strategy review it
    commenced in November 2016, including a potential plan to monetise a portion of locked-in recurring nbn
    receipts, a new dividend policy and a revised capital management framework.
    Speaking at the company’s full year results announcement, Telstra CEO Andrew Penn said Telstra had
    reviewed its balance sheet structure and settings, longer term capex requirements, investment decisions
    including M&A, returns to shareholders including dividends, buy-backs and other forms of returns, and the
    best way to manage receipts from the nbn.
    “We have consulted extensively with shareholders and other stakeholders during this review and the
    overwhelming and consistent feedback from this consultation process has been to ensure we are planning for
    the longer term, and retaining financial flexibility,” Mr Penn said.
    “This includes the importance of retaining a strong balance sheet through the nbn transition period and in light
    of the increased competitive dynamics and digital disruption.”
    The outcomes of the capital allocation review are:
    1) a potential monetisation of a portion of locked-in recurring nbn receipts, subject to legal
    documentation and satisfaction of certain conditions;
    2) a revised capital management framework focused on maintaining tight fiscal discipline, maximising
    returns for shareholders, maintaining financial strength and retaining financial flexibility for investment
    in the future; and
    3) a new dividend policy to more closely align ordinary dividends to underlying earnings1 and to return
    in the order of 75 percent of net one-off nbn receipts2 to shareholders over time via fully-franked
    special dividends.3
    Potential monetisation of recurring nbn receipts
    At its Investor Day in November 2016 Telstra said it would look at ways to crystallise value from recurring
    nbn receipts for key infrastructure and today announced a potential plan to monetise a proportion of these
    Mr Penn said recurring receipts for access to Telstra’s extensive infrastructure were expected to grow to
    just under $1 billion annually by the end of the nbn migration period.
    “If we were to proceed with these plans, it would involve approximately 40 percent of the total receipts that
    are expected, representing the already locked in receipts for fibre and exchanges,” Mr Penn said.
    “The scale of the proposed transaction is approximately $5 − 5.5 billion4 with Telstra to retain some equity
    interest. Our intention would be to use the proceeds to reduce debt by around $1 billion, with the balance to
    support a capital management program to enhance shareholder returns, most likely through a series of on
    and off market buy-backs.
    “The proposed transaction is subject to agreement and a number of steps including approvals and
    consents from investors, the Government and nbn co.
    “We are currently in discussions regarding these matters. We cannot confirm whether they will be achieved
    but we will update the market in due course,” Mr Penn said.
    Dividend Reinvestment Plan
    Given the ongoing discussions with nbn co and Government on the potential monetisation of a proportion of
    the recurring nbn receipts, in order for Telstra to manage its ongoing continuous disclosure obligations it has
    suspended the Dividend Reinvestment Plan with an intent to reinstate it when circumstances allow.

    Capital Management Framework
    The objectives of the revised capital management framework remain the same as those communicated to the
    market in 2012, including maintaining Telstra’s tight fiscal discipline, maximising returns for shareholders,
    maintaining financial strength and retaining financial flexibility.
    As a result of the capital allocation strategy review some of the principles supporting these objectives have
    changed. The new principles are to:
    • Maintain balance sheet settings consistent with an A band credit rating;
    • Pay a fully-franked ordinary dividend of 70-90 percent of underlying earnings;
    • Target capex/sales ratio of ~14 percent excluding spectrum from FY20; and,
    • Maintain flexibility for portfolio management and to make strategic investments.
    The revised Capital Management Framework is attached.
    Dividend Policy
    The new dividend policy supports the objectives of the capital management framework and is consistent with
    shareholder feedback to maintain a strong balance sheet and flexibility to manage the business and invest,
    especially during the nbn transition.
    Mr Penn said the new dividend policy, which will commence after the payment of the final dividend for the
    2017 financial year, would move Telstra away from a historical practice of paying out almost 100 percent of
    “From FY18 we will adopt an ordinary dividend payout ratio of 70-90 percent of underlying earnings1, which is
    more in line with global peers and local large companies,” he said.
    “In addition to the ordinary dividend, we intend to return in the order of 75 percent of net one-off nbn receipts2
    to shareholders over time via fully-franked special dividends.
    “We believe this is appropriate given one-off income is akin to compensation for an asset sale over a number
    of years and aligns with market feedback and expectations that these receipts are returned to shareholders.
    “With the implementation of this new dividend policy, we expect total dividends in respect of FY18 to be 22
    cents per share fully-franked, including both ordinary and special dividends.”3
    Mr Penn said in adjusting the capital management framework and resetting the dividend policy Telstra had
    balanced the importance of providing consistent returns to shareholders with the long term sustainability of
    returns and strategic direction of the company.
    “We realise this is a material reduction from the historic level of our dividend and we do not underestimate the
    impact on our shareholders. It is for this reason we are providing advance notice of this change and why the
    Board has maintained a 31 cents dividend this year,” Mr Penn said.
    “These are important changes to Telstra’s approach to capital management and appropriate in the context of
    our strategic transformation. This is about setting the business up for success in the future.”

    courtesy of Bell Direct

    ( DYOR )

    i hold TLS ... make that top up price below $3.90

    would have liked to see more debt retired .

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