Telstra shares dropped to their lowest price in five years on Thursday after the company announced a "material" reduction in its long-term dividend policy - a move that will affect about 1 million investors, many of them mum and dad shareholders and self-funded retirees.
The telco's sharemarket capitalisation dropped nearly $5 billion - to $47 billion - within minutes as the market digested news Telstra would pay out between 70 and 90 per cent of earnings rather than close to 100 per cent. It is the first big change in dividend policy since the telco was floated by the government in 1997.
However, analysts described it as a "positive" move that would help Telstra re-invest in its core business. And the Australian Shareholders Association called it a logical step.
"There will be shareholders who will be disappointed and think it will affect their income stream," ASA chief executive Judith Fox said.
"[But] it was a risky move to keep thinking they could pay out 100 per cent [of earnings] forever."
The stock plunged as much as 12 per cent, the biggest ever daily drop, to an intra-day low of $3.81 after the sharemarket opened on Thursday. It finished the day 10.62 per cent lower at a five-year low of $3.87.
"[Trading] volumes are enormous - there could not be a more important piece of information, particularly for retail investors, than the amount of the dividend," said Michael McCarthy, chief market strategist at stockbroker CMC Markets.
Telstra's payout to shareholders will fall 29 per cent next year from 31?? a share to about 22??, fully franked, as the company seeks to weather the impact of the national broadband network (NBN) on its profits.
Chief executive Andrew Penn agreed the dividend had been a "feature" for shareholders for many years, but said the change was necessary because Telstra's annual earnings would decline as its phone network infrastructure was "re-nationalised" by the government-owned NBN Co.
"In setting Telstra up for success in the future, we need a dividend policy which is far more aligned to our global peers, far more aligned to local large companies [and] gives us the flexibility to continue to provide what is actually still a significant dividend and attractive yield," he said.
Telstra is set to receive about $9 billion in coming years in one-off compensation as NBN Co takes over the "last mile" of the copper network between exchanges and homes. Telstra estimates the impact of losing ownership of that last mile will be up to $3 billion in earnings annually. It currently sells access to this network to the rest of the industry at regulated wholesale prices.
The one-off payments include the disconnection fee that Telstra receives for each premise transferred to the NBN, as well as retraining payments for technicians and payments from NBN to Telstra for infrastructure.
Of the 32.5?? earnings per share generated in the past financial year, about 7.6?? (23 per cent) were from one-off NBN payments and the remaining 24.9?? came from a 95 per cent payout of underlying earnings.
In the future, shareholders will get between 70 and 90 per cent of Telstra's underlying earnings and 75 per cent of the NBN one-off payments. The NBN one-off payments are likely to peak in the next two years, then decrease as the NBN reaches completion.
???"We realise this is a material reduction from the historic level of our dividend and we do not underestimate the impact on our shareholders. It is for this reason we are providing advance notice of this change and why the board has maintained a 31?? dividend this year," Mr Penn said.
Investors 'likely to be disappointed'
Citi analysts expect dividends are "likely to continue declining through to 2020-21 as underlying earnings fall further during the remainder of the NBN rollout".
"Shareholders will need to adjust to the new dividend and capital policies, and in our view yield-focused investors are likely to be disappointed with the new trajectory of dividends," they wrote in a note to clients.
However, the Citi analysts believe that Telstra's decision is a positive move that will allow it to re-invest more capital in its core business.
They still value the stock at $4 a share. At this price, with an expected dividend of 22?? in 2017-18, Telstra shares have a yield of 5.5 per cent.
Management has also proposed creating a separate investment company into which up to $5.5 billion will be securitised for investors. This amount is 40 per cent of the recurring income Telstra expects to get for leasing its fibre and exchanges to NBN Co on a 30-year lease. It has not yet decided what to do with the remaining 60 per cent of those payments.
Net profit slumps
???The dividend announcement came as Telstra said its full-year profit in the year to June slumped by about a third to $3.9 billion, primarily due to a $1.8 billion windfall gain in the prior year from the sale of Chinese car web site Autohome.
Operating expenses increased 5.8 per cent to $17.6 billion, but the company still managed to report a 2 per cent increase in operating earnings to $10.7 billion.
In the various divisions, Telstra's retail arm saw a 2.1 per cent decline in revenue to $16.5 billion, while its enterprise division increased revenue by 1.6 per cent to $6.3 billion.
The revenue decline from retail is due to a regulatory decision on inter-carrier mobile fees. Without this decision, it would have been down just 0.2 per cent.
The company's profit margin on fixed data has dropped from 41 to 31 per cent as it adjusts to being an NBN wholesale customer. Total mobile customer numbers increased by 300,000 to 17.5 million services. Mobile broadband revenue dropped 13.7 per cent as customers stopped using mobile dongle plans in favour of tethering to smartphones with increased data allowances.
Telstra Operations's revenue jumped by more than 95 per cent to $1.2 billion as revenue from NBN contracts rose from $589 million to $1.1 billion. And NBN disconnection payments also helped boost the "other" income category from $729 million to $1.4 billion.
The story Telstra sheds $5b in minutes after dividend warning first appeared on The Sydney Morning Herald.