Telecom NZ has reported a 2011 full year adjusted profit of $388m. This was a positive surprise, coming in around 10% higher than analysts’ expectations. This result has seen the stock perform well on a difficult day for the market. The company also announced a higher than expected final quarter dividend of 9.5cps, and a total dividend for the full year of 20cps. The key driver behind the result was a good cost out performance by management, who were able to cut costs by more than the fall in revenues. Although revenues fell compared to the prior year, good growth in second half Mobile revenues does suggest that good momentum exists in a key part of the business.
It has been more than interesting to follow the Telecom NZ story over the last 4 years. In that time, regulation, poor investment decisions, as well as the structural decline in traditional telephony products, has chipped away at revenue and profits. To gain some idea of just how difficult the story has been, consider this: comparable profit in 2007 was $844m, compared to $388m today, a decline of 54%! The Telecom NZ share price on this day 4 years ago was $4.02, compared to a price of $2.70 today, a decline of 33%.
So, is there some hope for shareholders in today’s announcement? Today’s result demonstrates that as management attention turns away from issues beyond its control, such as regulation as the ultra-fast broadband process draws to a conclusion, and onto issues that it can control, such as costs and cash flow, investors can expect to see better outcomes over time. What this means is a return to earnings growth and better returns, through higher dividends. After a challenging period, shareholders can be entitled to feel that their patience will be rewarded at last.
Marc Whittaker