Telstra moves to calm jittery investors

The telco says it will bend its own rules to achieve a 16 cent dividend if necessary.

Telstra CEO Andy Penn. Picture: Aaron Francis

Telstra has moved to reassure nervous shareholders about its dividend, with chairman John Mullen declaring that the telco would temporarily exceed its payout ratio to achieve it if necessary.

Speaking at Telstra’s first ever virtual AGM, Mr Mullen said the board was “acutely aware of the importance of the dividend to shareholders”, and understood the nervousness from some that COVID-19 and other pressures may force Telstra to again cut its dividend.

He said the telco was still aiming to achieve underlying earnings before interest, tax, depreciation and amorisation of between $7.5bn to $8.5bn in the 2021 financial year, despite headwinds from COVID-19 and the NBN.

“The board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70-90 per cent of underlying earnings to maintain a 16c per share dividend,” he said.

“This does not represent a guarantee of any level of dividend into the future as the board will need to consider all relevant circumstances before declaring each dividend, but hopefully this clearly demonstrates the board’s commitment to doing all that it can responsibly do to maintain the current dividend and eventually increase it again over time.”

Telstra shares jumped on the comments, closing up 4 per cent on Tuesday at $2.89.

Mr Mullen acknowledged the telco’s earnings, dividend and share price had been “disappointing”, due to the impact of the NBN and other headwinds.

Australia’s biggest telco in August revealed it was facing a $600m hit over two years and a challenge to maintain its 16c per share annual dividend.

“The board of Telstra is acutely aware that the level of earnings being delivered by Telstra, the dividend and the share price are a disappointment to many investors, as indeed they are to us as well,” Mr Mullen said in his chairman’s address.

Telstra chairman John Mullen.

“The reality is that Telstra has lost over $6bn of profit in the last decade or so, predominantly from the impact of the NBN but also the loss of voice revenues, SMS revenues, global roaming and other pressures, and this has had an inevitable impact on earnings, dividends and our share price.

“There are few precedents in corporate Australia for an impact or a challenge of this magnitude.

“Against its domestic and global peers, although tough for everyone, Telstra’s performance stands up well across most metrics including earnings, ROIC, margins and revenue per user.”

The chairman also used his address to call for the simplification of executive renumeration structures, describing them as overly complex and confusing.

“I am old enough to remember when I just got paid a salary and if I did a bad job I was fired. I sometimes wonder whether we should not go back to those days and just give senior executives a fixed salary, the majority of which would be paid in shares so that if the company’s shares perform well then the executive would earn more and if they perform badly the executive would earn less.”

The executive said he remained positive about Telstra’s future. Telstra on Tuesday reaffirmed its guidance and said that much of its T22 transformation had been completed, and that more than 50 per cent of support calls were now being answered in Australia.

“The NBN is finally almost behind us, our underlying EBITDA excluding the NBN headwind has started to grow again, and new opportunities are opening up every day.”

He added that Telstra’s investment in Foxtel was “going well” and that Telstra would eventually explore opportunities with NBN Co, including “maybe some sort of transaction”, though any deal would be years away.

The comments came as three Telstra executives including chief executive Andy Penn were hit with a 10 per cent pay cut as a result of misconduct involving some of the telco’s partner stores and Indigenous customers.

“There is one key area this year where the board did exercise its discretion and three executives, including Andy, had a 10 per cent reduction in their individual outcomes, reducing payments to these executives collectively by $758,000 as a result of an issue relating to sales practices in a small number of our partner stores,” Mr Mullen told investors.

Mr Mullen said Mr Penn had been upfront about the issue that had seen his remuneration cut.

“To his great credit, this is an issue that Andy has spoken about publicly and at length over the past year,” Mr Mullen told investors.

“In summary, some years ago we became aware of an issue where a small number of our partner stores, those operated by third parties under a licence agreement, sold mobile devices and plans to a number of Indigenous customers that ultimately they could not afford or may not have been appropriate for their needs.

“When we investigated, we found that there had been some cases of serious misconduct. To provide context, however, this represented some 100 customers out of nearly 10 million, and 100 or so devices out of the approximately 2 million that we sell each year.

Mr Mullen said all debts were being waived or refunded, and that in almost all cases the customers had kept the equipment.

“But even one example of bad practice is too many and we acknowledge and accept full responsibility for these failures,” he said.

Mr Mullen said Telstra was working with the ACCC to ensure the issue did not re-occur.

“Our view in these matters is that the responsibility ultimately stops with the company’s leadership and the board’s decision on remuneration outcomes for Andy and two of his executive team reflected that while there was no specific adverse conduct by them personally, they were ultimately accountable.”