Broker expects largess from Telecom

By PETER GRIFFIN telecoms writer

Telecom is staying quiet on when its shareholders can enjoy an increase in dividend payouts, but sharebroker ABN Amro is picking a higher dividend as soon as February.

With the bulk of Telecom's lumpy capital expenditure commitments behind it, the company's shareholders are expecting a return to the more generous dividend ratios of the mid 90s, when payouts exceeded 90 per cent of net earnings.

Management's priority is to lower the company's ratio of gross debt to earnings before interest, tax, depreciation and amortisation from 2.11 to below 2, after which increased dividends will be considered. It is expected this target will be reached this financial year.

Telecom now pays out a 5c dividend per quarter and has a policy of returning 50 per cent of earnings to shareholders.

In a report on the company's full-year profit of $709 million, announced on Tuesday, ABN Amro said Telecom could affordably increase its quarterly dividend payment to 9.25c a share from the end of its December half year, with payment in the following quarter.

"We forecast that it will reach its gearing targets in [the second quarter of next year] and announce an increased dividend in February 2004," the report said.

It noted that Telecom would generate cash flow of over $600 million after paying the current dividend and this could be used to increase the dividend or repay debt.

"We believe [Telecom's] share price would be best supported by increasing the dividend to an affordable level, committing to further increasing the dividend by 3 per cent each year and applying remaining free cash flow to repaying both debt and equity in order to retain an efficient capital structure."

Telecom had excess depreciation and amortisation over capital expenditure, which produced extra free cash flow. Telecom's share price yesterday closed 4c higher at $5.30.