Telecom shares rise ahead of hoped-for dividend payout

Rob Hosking

Friday 30th January 2004

Investors will be looking to see whether Telecom's quarterly result next Thursday includes the promised dividend rise.

Last August, Telecom chief executive Theresa Gattung promised a rise in dividends this financial year and there is a growing expectation a payout increase will be announced when the company releases its second-quarter result next week.

The current quarterly dividend is five cents a share: some analysts are picking it could go as high as nine cents, although that may be a two-stage process.

Anticipation of the dividend rise is one of the reasons behind the surge in Telecom's stock over recent weeks. The stock has been running at the highest it has been for two and a half years.

Telecom may opt for a more cautious increase in the payout because the company wants an increase in its credit rating this year.

While investors are not as leery of telco stocks as they have been since the 2000 tech-wreck, there is still a measure of caution. Even a slight rise in dividend, along with a better credit rating, would make Telecom stand out a little more from the pack.

The other causes for the increased popularity of Telecom in recent weeks have come from the New Zealand dollar's appreciation against the US currency a situation which is unlikely to last more than a few months and telecommunications commissioner Douglas Webb's decision before Christmas not to force Telecom to open up its "local loop" to competition (Shoeshine, January 23).

The decision was more favourable to Telecom than many were expecting.

"The risk of how far regulation could go has effectively been reduced over the past five weeks," one analyst told The National Business Review.

An earlier draft decision from the commissioner had taken a far more draconian approach to the issue, and the December decision is seen as telling investors that the commissioner is unlikely to take drastic action that affects the company's investment.

Two aspects of Thursday's result ,which is expected to show a quarterly profit of $165-200 million, will be watched beadily by analysts.

Progress in the mobile market is key to affirming that Telecom is back on the front foot.

The other mobile network provider, Vodafone, has stolen a march on Telecom over the past couple of years, coming from behind to take the majority of new customers.

With talk of a third mobile network being built in New Zealand, Telecom has to show that it has pulled back some of Vodafone's lead.

This issue was identified by Ms Gattung six months ago as a key focus this financial year.

Sales of access to Telecom's new (and expensive) CDMA network, which provides the 027 numbers, had been disappointing, she said.

She also announced a strong drive into the youth market, which Vodafone had made its own.

This Thursday's result should show just how successful Telecom has been in peeling back the Vodafone lead.

As usual, the company's Australian investment will come under scrutiny, although one analyst suggested that the Australian operation had been over-discussed in the media.

"The Australian side of things is not nearly as important as the New Zealand operation right now especially mobile. Mobile is where we are going to see future revenue growth," the analyst said.

"Australia is going to be difficult for quite some time but it is not losing money.

"It is cashflow positive and Telecom is not throwing masses of capex at it anymore."

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