Telstra has put on hold any decision to undertake a share buyback or lift dividends despite reaping billions of dollars from the national broadband network deal.

Australia’s largest telco said in a market update today it would have $2-3 billion worth of excess free cash flow in the next three years as a result of its participation in the NBN.

However, it has maintained its full year dividend at 28 cents a share and said a share buyback at this time would not be an efficient use of the excess capital, estimated to be between half to one billion dollars at the end of 2011-12.

The telco said it planned to keep its dividends unchanged for 2012 and 2013, disappointing investors hoping for a higher payout.

Analysts had been expecting the company to announce a $1.5-2 billion share buyback program over 2013-15.

Chief financial officer Andy Penn said an increased dividend or share buyback would be unlikely before 2014, which means shareholders would have to wait until about 2015 to see the money from the NBN deal flow through.

"Our preference for returning capital to shareholders is via growth in franked dividends.  However, we do not expect to have the franking capacity to increase the dividend before 2014".

"At the current level of our excess capital today, we do not believe an on-market buy back would be efficient or to put it another way, we do not believe it would be of a magnitude to be meaningful".

It announced the principles and rules which would govern how it would return this cash to shareholders, but did not provide specific details of timing and dollar figures.

‘‘The payments and benefits received under the NBN transaction, which are implicit in the $11 billion of post tax net present value, are expected to help offset the reduction in free cash flow from the fixed line business,’’ Mr Penn said.

‘‘Notwithstanding this, there is, in the next couple of years, an increase in free cash flow to Telstra as a consequence of the timing of the NBN financials.

‘‘We expect to generate up to an additional $2 billion to $3 billion in excess free cash flow over the next three years.’’

Subject to the pace of the NBN rollout, $1 billion of that cash could be realised in 2013 and 2014, he said.

The priority for capital management would be "to maximise returns for shareholders, maintain financial strength and retain financial flexibility", Telstra said in a release.

The release confirms Telstra will pay dividends of 28 cents over 2011-2012 and 2012-13 would be fully franked.

Another guiding principle would be "maintaining flexibility for portfolio management and to make strategic investments".

The company would not borrow money in any full year to pay its dividend or fund capital returns and would maintain it's single-A credit rating, which would keeps its costs of borrowing down.

lbattersby@theage.com.au

with Agencies