Underlying growth supports 18 cents fully franked dividend

Importantly for many Telstra shareholders the annual 18 cents fully franked dividend appears set to continue into FY25. This is subject to Telstra achieving its FY25 Underlying EBITDA guidance which at $8.6 billion is 4.8 percent higher than the company’s FY24 EBITDA.

Telstra’s FY24 $2.3 billion Underlying Net Profit After Tax was up 7.5 percent on the previous financial year. The result is equivalent to Underlying Earnings Per Share of 18.5 cents.

Reported Net Profit After Tax declined by 12.8 percent to $1.8 billion, and Reported Earnings Per Share was 15 percent lower at 14.1 cents. The $0.5 million difference between Underling and Reported profit relates to significant one-off costs relating to staff redundancies in May 2024 and asset impairment charges relating to Telstra’s existing data and internet services.

The stand-out feature of Telstra’s result is the resilience of its mobile phone business which grew top-line earnings (EBITDA) by 9.2 percent or $400 million, to $5.02 billion. This growth was driven by 560,000 more mobile phone customers and 2.7 percent higher average revenue per user.  Mobiles account for 60 percent of Telstra’s Underlying EBITDA.

Telstra’s fixed infrastructure business, known as InfraCo, also reported a solid EBITDA result of $1.76 billion, an increase of 5.8 percent. This product segment contributed 21 percent of Underlying EBITDA and includes data centres, inter-city fibre networks, subsea cables, satellite ground stations and other essential telecommunications infrastructure.

The other notable feature of Telstra’s FY24 result is that it reduced Underlying operating costs by $52 million in an inflationary environment. This is in addition to the net cost-out amount of $70 million in FY23. Telstra is targeting a further $228 million in operating cost savings in FY25.

Telstra continues to generate high free cash flow of $2.98 billion, up 7.3 percent on the previous financial year. This amount adequately services existing net debt of $15.8 billion at an average borrowing cost of 5 percent, with interest on debt covered 11 times. The gearing ratio was 48 percent at June 30 2024. Telstra maintains a strong investment grade credit rating of A-.

Outlook

Telstra’s FY25 earnings guidance implies that the Board’s intention is to maintain the dividend at 18 cents fully franked per annum and increase it over time. Given Telstra’s gearing sits at 48 percent, and it has committed $1.6 billion in intercity fibre and satellite projects in FY25, there is little scope for the dividend to be materially increased in FY25.

However, Telstra’s world-leading mobile network of 99.7 percent population coverage, providing 26 million mobile services, using high-quality connectivity infrastructure in which $42 billion has been invested over the past 10 years, ensures the telecommunications carrier will maintain its dominant market strength in the decade ahead.

Telstra’s connectivity supports businesses, governments, households, and public services, and is essential for the day-to-day functionality of the Australian economy.  This capability and given the essential nature of telecommunications in the digital and information age, should support a reliable dividend stream to shareholders at least in the medium term.