Telstra Network Paradox:
Growth Trap: More network → More customers → More usage → More capex.
Returns Impact: Historically subpar ROC (5-6%) due to continuous investment needs.
Future: 10% ROIC by 2030 is highly ambitious
5G Network Evolution
Higher frequency bands require denser base station networks.
Fixed mobile internet growth (NBN competitor) increases infrastructure demand.
Hypothesis:
Telstra’s competitive advantage in network quality requires sustained high capex, limiting FCF and shareholder returns.
Capex: 16.5% × $23Bn revenue = $3.8Bn annually.
FCF Under The Hood
Current EBIT: $3.8Bn
Capex Intensity: 16-17% of revenues
~$23Bn revenue, so capex ≈ $3.7-3.9Bn.
Depreciation & Amortisation: ~$2.5Bn (typical for telcos).
Taxes: $3.8Bn × 30% = $1.14Bn.
FCF = EBIT + Depreciation - Taxes - Capex – WC
FCF = $3.8Bn + $2.5Bn - $1.14Bn - $3.8Bn - $0 (stable)
≈ $1.36Bn.
FCF Yield = $1.36Bn / $75Bn
≈ 1.8% (low, reflecting capex burden)
High capex requirements suppress FCF, limiting reinvestment or dividend growth potential.
Reasoning:
Despite operational improvements, the “Network Paradox” (more usage → more capex) constrains FCF growth; hence IMO the Share Price (~$5) has reached a Plateau.
Telstra’s high capex (16–17% of $23B revenue, ~$3.8B annually) drives the network paradox, where network expansion attracts more customers and usage, necessitating further investment, which in turn limits free cash flow (FCF) to $1.36B and a low FCF yield of 1.8%, constraining its ability to fund growth or dividends sustainably.
The continuous capex burden, particularly for 5G and future 6G upgrades, exacerbates this paradox, reducing available FCF for reinvestment or debt management, making it a risky proposition to allocate FCF toward dividend per share (DPS) funding ($0.46, 70% payout ratio) without compromising financial flexibility.
Relying on FCF for DPS amidst this high capex cycle increases Telstra’s risk, as it leaves little buffer to address unexpected costs or competitive pressures, potentially forcing a reliance on debt or asset monetisation (e.g., InfraCo, properties, spectrum) to maintain dividend stability, further straining its balance sheet.
Telstra’s DPS allocation aligns with industry standards but is riskier due to its structural capex disadvantage, as highlighted by the network paradox and peer comparison (Verizon/T T-Mobile saving ~$1Bn annually).
This is a risky proposition, relying on further Price Increases and Asset Monetisation to increase FCF (10% ROIC by 2030 is highly ambitious).
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