Telstra (ASX:TLS) A Good Investment?

Now, I'm no Telecommunications analyst but that hasn't stopped me from thinking a lot about Telstra. 


I must admit that there have been times when I have thought "Why am I invested in this Company that is so much at the behest of Political events". However with some sort of resolution of the political situation the stress of that thought is largely removed for me. Either the NBN is going ahead with a re-elected Labor Government under a deal that Telstra has negotiated or the NBN will be cancelled/modified under a newly elected Liberal Government. Neither of those outcomes will provide any further negativity for Telstra. I'm going to assume the first outcome (the second outcome may be marginally "better" for Telstra).


If we dissociate from our personal views on whether the NBN is a good or bad thing and, furthermore put aside our own personal views as customers of Telstra ("I hate Telstra because they took 3 days to fix my phone") then we might have a chance of seeing through to Telstra as an investment.


Let's cut to the chase. Telstra is currently paying an annual dividend of 28c. On a share price of $3.20, that is a dividend yield of 8.75%. That is a fully franked dividend so it grosses up to a yield of 12.5%. Nobody can argue that that is not a great return on our investment. 


Clearly, the question is "How long can it keep this dividend up?".  Purely the fact that the yield is so high (ie the Share Price is so low) could be read as the Market feeling that this dividend stream will not last for long. I think that the market has it wrong.


Under the NBN Telstra eventually decommissions its copper network and utilizes the NBN to provide services to its customers. Clearly Telstra loses the income that it was making on those copper lines but receives compensation for that from the Government. I can only assume that after the long and hard bargaining that was conducted (and the political imperative of the Government to lock in a deal at a particular point in time), Telstra achieved a deal that they felt would be reasonable for their future (otherwise they would not have done the deal). So, in many ways, Telstra becomes one of many Telecommunications providers in the Australian market. As is always the case in this type of situation their job will be to achieve and hold a significant market share by differentiating themselves. I firmly believe that the pie will grow over coming years.


The NBN is going to take several (eight?) years to fully implement. Over that time Telstra will continue to generate (reducing) revenue from their copper infrastructure. Furthermore, their capital costs of upgrading and maintaining the copper will reduce. I would imagine that much new infrastructure that perhaps would have been built will now not be built (why build something that is going to be superseded in a few short years). The capital that would have been spent on this can now be redirected to other longer term profit generating projects. It's an interesting formula but it seems to me that Telstra have several years of the continuation of huge cash flows ahead, during which time they can reshape the Company for the long term.


The removal of the Universal Service Obligation (USO) from Telstra is significant. It happens essentially immediately and removes one of the significant imposts upon Telstra. I believe that that was a very important part of the deal that was done with the Government. There should be a significant expense saving here that takes place virtually immediately.


Telstra have the best wireless network in Australia. Under the deal they will now be able to bid for 4G spectrum to maintain their leadership here. The world is changing. We are now at the point of simply expecting that we can access our internet anywhere, anytime on any device that we choose - the iPad and similar devices will add enormously to this growth. Furthermore, we have become quite accepting of the fact that we pay a premium (over fixed services) for this service. I believe that this will be a big driver of future profits for Telstra. This will no doubt be an area of large capital investment by Telstra.


Under the deal Telstra now get to keep their Foxtel.


The weak horse in the stable is probably Sensis.


In the end, I believe that the reshaped Telstra has every chance of reshaping itself into a leaner and cleaner organization that will continue to generate great profits long into the future. I don't see the dividends being cut. I'm happy with a grossed up yield of 12.5% (who wouldn't be?).


Of course I could be wrong. Telstra could stumble, they might cut their dividend and their share price might fall. That could happen to any company. Our job as investors is to make our own decisions about where we risk our money (there is always risk). 


A yield of 12.5% gives me a big moat.


What thinks you?