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Hot Stock: Telstra

What's new? No share buyback is in the offing but with up to $3 billion of excess free cash flow during the next few years, Telstra shareholders are swimming in dividends.

With the over-gestated national broadband network (NBN) deal about to spawn an $11 billion stream of cash during the next 10 years or more, Telstra is in the unfamiliar position of having to manage an excess of cash.

The company has promised to contain its capital expenditure to within 14 per cent of group sales, but this figure excludes money needed for new spectrum, which will be funded by debt.

The company's balance sheet is already in reasonable shape and its new chief financial officer, Andy Penn, plans to keep it slim and trim with a single-A credit rating, among other virtuous parameters.

The exciting aspect for shareholders is the prospect of even larger dividends from 2014 when the company will have sufficient franking credits to lift it beyond its current annual 28ยข-a-share rate.

Shareholders will have to make do with a gross dividend yield of 11.5 per cent until then.


Outlook The timing of the cash flow from NBN Co depends on the pace of the network's introduction. Telstra is somewhat ambivalent about this as it will continue to generate cash flow from its copper network until the NBN replaces it, at which time the company receives a payment for the migration of each customer to NBN Co.

We've already seen how malleable the implementation is, with the latest set of plans indicating that the 2014 peak is probably optimistic.

The plan could change quite a bit more if there is a change of government at the next election but the NBN deal has left Telstra well protected in this scenario.

In the meantime, as consumers become increasingly mobile, Telstra is at the forefront of the wireless technology revolution with a first-class network from which it can launch innovative new products and services.

Price After the Future Fund finished dumping the stock in the middle of last year, the share price steadily worked its way up from about $2.61 to the $3.47 mark. In a one-year stretch, Telstra has increased by 23 per cent while the ASX 200 has gone backwards by 9.9 per cent.

Worth buying? Telstra is a major sponsor of the Australian Olympic team hoping to go faster, higher and stronger in London in July.

Shareholders of Telstra will be optimistic the board can do the same with its dividend in the next few years. If the game plan on the excess cash flow plays out as the company anticipates, it will be a gold-medal performance.

Greg Fraser is an analyst at Fat Prophets sharemarket research.