Business News

The Telstra situation

| More

by Peter Switzer

At the risk of stealing a line made famous by Rove McManus, when I think about the Telstra share price languishing below $3 and in the record low close price of $2.91 territory, I can only come up with: “What the #!#!”

Thank God so many Aussies are welded onto the stock market via superannuation. It’s worth noting, with the Commonwealth Bank being the exception, the experience of Government sell-offs hasn’t been great.

Telstra and Qantas have not been great to mums and dads stock players, share price-wise, however, the Commonwealth Bank has been a ripper. At close yesterday it was at $54.82.

Political issue

Not surprisingly, The Weekend Australian last Saturday showed Coalition polling in marginal seats in Queensland showed that the Telstra handling by the Rudd Government has become a political issue that could be exploited by the Abbott team.

Remember, 1.4 million Australians are direct shareholders in Telstra and then there are the public servants, or more correctly the ultimately responsible taxpayers, who rely on the Future Fund to cover the retirement super for ex-Government employees. The Future Fund is Telstra’s biggest shareholder after the Howard Government rolled its shareholding into the Fund.

Super fund connection

And if you want to extend it further, lots of super funds would hold Telstra shares in their portfolios and that means if the big telco gets screwed then the pain will be shared right down the line.

By the way, that pain sharing has already started with the average share price of Telstra falling from the $3.20 to $3.30 region where it seemed to hover for some time to the current hover-region of $2.91 to $2.93. You can put this down to the revelations of Senator Stephen Conroy, who is the Telecommunications Minister, on what the Government proposed about Telstra’s break up.

Super-information highway

One big surprise was the fact that the National Broadband Network (NBN) might be able to compete with telco companies for business such as government contracts. Most thought the NBN would roll Telstra’s fixed line infrastructure into an expanded network to create, if you like, one big super-information highway, onto which all telcos could access for a price and we all would enjoy very fast downloads.

Since this came out in the open, the share price has dived but undoubtedly it’s the uncertainty about the break up, Telstra’s response, or lack thereof, and even the threat of court action that has spooked investors.

Break-up

However, in case you think Telstra is a dead duck, UBS has a $4 price target on the company! So, what’s going on?

My old mate, Ian Verrender, writing in the SMH, thinks the whole battle gets down to one big issue and that is what will the Government pay Telstra for the break-up?

There was talk of $33 billion but Verrender says $8 billion is what analysts are thinking.

At the moment Telstra’s boss, David Thodey, is playing a waiting game while the Government is trying to stare him down but the latter has an election as well as voters to think, no, worry about.

In the meantime, shareholders have to sweat it out and ponder should they wait hoping for a price kick eventually or should they cut their losses to buy a better stock in a rising market?

Making matters worse, the Senate is likely to stop the NBN legislation and there doesn’t appear to be enough time to get it passed anyway.

No man’s land

The likely scenario is that Telstra shareholders will remain in no man’s land for some time yet and will have to make a decision to sell or hold, or thrillseekers, who like the eight per cent plus dividend, could always buy the stock.

But the big lesson is don’t buy privatised stocks where the Government remains in the play. With the CBA, it was a clean cut with Government. The whole sorry Telstra saga reminds me of a Paul Keating warning about State Premiers, which I think applies to most politicians. Keating once warned: “Never get between a [State] Premier and a bucket of money.”

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Tuesday, March 09, 2010