Telstra chair Mullen to instos: no more dividend cuts

Telstra has said the 2018 full-year dividend would be reduced by 30pc to 22c.

Telstra chairman John Mullen has been reassuring the telco’s largest institutional investors that the dividend is unlikely to be cut further and urging calm over the pressure building on chief executive Andy Penn.

Mr Mullen has met fund managers, and Telstra’s senior managers are holding meetings with its biggest retail shareholders around the country to assure them there won’t be any further cuts to dividends.

The company ordered a major capital shake-up last month when it said the 2018 full-year payout would be reduced by 30 per cent to 22c.

The telco paid a 2017 full-year dividend of 31c and Mr Mullen had warned investors ahead of the results that the payout ratio was under consideration.

This is Monday's dataroom on Telstra

Telstra has traditionally paid out up to 100 per cent of underlying earnings and as a result has one of the highest retail shareholder bases on the ASX. But, given Telstra is facing a major earnings blackhole thanks to the NBN rollout, the payout ratio will be reduced from 90 per cent 70 per cent.

The cut was by considered by analysts as a prudent move to prepare for the $3 billion a year blackhole that the company faces from the lost earnings from NBN. However, institutional investors were surprised by the depth of the dividend cut and are fearful more could come.

But Mr McMullen has been at pains to tell shareholders that Telstra is confident the payouts will start to increase and that 22c is effectively the floor.

This is Monday's dataroom on Telstra

About 6c of that dividend is considered the component coming from the government’s NBN payments each year. The hit to Telstra’s retail business is expected to be felt shortly as the NBN rollout gathers pace.

The recurring payment to Telstra from NBN is about $1 billion a year, but the telco’s plan to securitise those payments was scotched recently by the NBN.

A reduced dividend payout will help Telstra pay down debt and effectively build a capital war chest, but major shareholders have told Mr McMullen that Telstra should not buy its way out of trouble.

This is Monday's dataroom on Telstra

The company has spent nearly $300 million building up Telstra Health over the past few years, but the venture has been considered a flop and some observers say should be sold.

At the same time as soothing dividend concerns, Mr McMullen has also faced questions over Mr Penn’s future.

DataRoom understands that investors are growing impatient that the strategy Mr Penn has outlined is not moving fast enough to cover the looming revenue shortfalls.

Telstra observers say Mr Penn, who became CEO in May 2015, could survive if there are no unexpected dramas in the next few months, but his future is under increased scrutiny.