This week I attended a drinks function with the vast bulk of Telstra’s senior management team, ahead of Telstra’s investor day.
Part of my job is reading body language of company executives. If I am any good at that, I can sense a growing confidence in the Telstra camp.
This is the complete reversal from three years ago, when any time you met a Telstra executive they were on the defensive.
To me this change is very important. The greatest returns you make are from companies with an internal confidence, not an arrogance, but a confidence. When that confidence meets a consistent strategy, you generate market-beating returns.
I just get the feeling the Telstra executive team has worked out that Telstra is holding all the cards in the sector (see Barrie Dunstan’s Monday column for his view on Telstra as the best media play). As I have written before, mobile data growth is through the roof as we transform to a digital economy, and the Australian economy simply can’t open for business each day without Telstra’s networks.
I see Telstra as the “railroad” and the technology-based companies as the “carriages” on the railway. Interestingly though, the market currently pays a massive P/E premium for the “carriages” over the “railroad”. It is like the old fable of the hare and the tortoise, but just remember who ends up winning that race.
Growth plus yield
Telstra is actually a growth stock, with a rising and high sustainable dividend yield. While most investors have bought it for its high and reliable fully franked dividend stream, what they didn’t realise, is they actually bought a growth stock. Telstra this year will generate back-to-back years of double-digit EPS growth. It is a clear GDP plus growth stock, as top line growth translates to even stronger bottom line growth.
This is an extremely important point. If I am to be proven right and Telstra raises the FY14 annual dividend from 28 cents fully-franked to 30 cents fully-franked, for that to happen I suspect the Telstra board has to be very comfortable with EPS cover for the DPS and the sustainability of that EPS growth.
FY14 consensus EPS estimates continue to be revised up, but in my opinion, they remain too conservative. As you can see below, consensus jumped after the FY13 result, once analysts released they had underestimated the translation from top line growth to bottom line growth. The circled area below focuses on that area.