What’s Australia’s “Golden Cloud?”

by Travis Johnson, Stock Gumshoe | January 13, 2015 12:07 pm

Checking in on the latest teaser from David Dittman's Australian Edge

Several Gumshoe readers have been asking about the high-yield, high-safety pick being teased by David Dittman for his Australian Edge service — it’s touted as “The One Cloud Computing Stock to Buy Now,” and it’s a fairly easy stock for US investors to buy if they’re interested…

… and we do love to at least throw a bone to our fabulous Aussie readership every now and then and cover one of the “their” stocks. Especially now that it’s been a couple years since everyone was excited about new iron ore, uranium, LNG or other natural resources projects in Australia. (I don’t think I’ve looked at the Lucky Country much since Steve Sjuggerud touted it as the home of the perfect currency hedge about 15 months ago[1]… that didn’t work out, the Aussie index and the Aussie dollar are both down more than 10% since September 2013).

But anyway, they’re trying to sell you this $497 subscription in order to learn about the “golden cloud” stock… and the pitch opens thusly:

“Potential storms hang over the U.S. and world markets…

“But in Australia the skies are clear.

“Well, almost.

There’s something new in the Australian skies, but it isn’t a storm cloud…

“This ‘Cloud’ Has a Golden Lining (and a 5.3% Dividend)

“An Australian communications company has just launched a ground-breaking new ‘cloud’ service. Businesses small and large are now beginning to outsource all of their computing to this innovative service.”

So what is it? Well, it’s a long tease (you can see the full thing here[2]) and the answer isn’t all that well disguised so I imagine you could figure it out for yourself … but it’s also one we’ve covered before, back when Roger Conrad was still working at Investing Daily and was first launching their Australian Edge service along with David Dittman. So we won’t make you sit through the looooong spiel or our cluey tidbits as we work our way through to the answer: This is Telstra, the “blue chip” dominant telecom company Down Under. Ticker is TLS in Australia, TLSYY for the 5:1 ADR (equivalent to five Aussie shares).

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And it has done pretty well in the three years since Conrad and Dittman were first touting the stock as their “cloud computing” Aussie play[3] — the stock in Australia is up something like 85% and has paid a strong dividend all along the way (not necessarily a growing dividend — the payout was flat for almost a decade before they started to increase it last year), and stock price appreciation has driven the dividend down from about 9% to 5%.

Unfortunately, the collapse of the Aussie dollar (from better than parity with the US$ then at around US$1.05 for each AUS$1, to about 80 cents now) has made the performance for US investors quite a bit more tepid, so Tekstra shares in the US have done a bit worse than the S&P 500 if you don’t count dividends, and a bit better than the S&P if you do. It has done far better than the big US telecom names like Verizon (VZ) or AT&T (T) during that time period, for whatever that’s worth.

The company is quite a bit different now than it was in January of 2012 — the big deal with the National Broadband Network (NBN) to interconnect their fiber network with Telstra’s copper networks spent many years in flux, thanks to political changes in Australia and Telstra’s fight to maintain the roughly $11 billion payout from the government in exchange for essentially giving up its monopoly copper wire network and using and cooperating with the NBN’s fiber and wireless plans to spread broadband access to almost all of the population. There is now, as of last month, a revised deal in place that Telstra says preserves the value of the NBN deal[4] (that $11 billion) for Telstra shareholders, you can see the details here if you’re curious.

Those expected payments from the NBN and the divestment of some of their other operations, including a Hong Kong mobile network, have left the company flush with cash and they used that for some buybacks and dividend increases last year — but Telstra management is still talking about investing in growth, whether that’s Asian consumers or cloud services or whatever might end up sticking to the income statement over the next few years (and they say they’re not spending all their cash[5] just yet). There’s a pretty good article here about Telstra’s “crossroads”[6] — the article’s from October, when the stock was about 10% lower than it is now. You can also see the long presentations and transcripts from Telstra’s Investor Day last Fall here[7] if you want more of a broad picture.

And that’s about all I can tell you about Telstra — they do seem to be at a transition point, as they ease away from the high-margin services they’ve profited from since the company first started to be privatized almost 20 years ago (it’s been fully private for only about eight years, the government retained a large stake for a long time), and as they seek growth opportunities in much lower-margin businesses like cloud computing services and mobile both in Australia (which is a pretty mature and competitive market) and in higher-growth parts of Asia.

I don’t know if it will work out well for Telstra in the end, but they do start off this process with a nice cash pile and a relatively manageable balance sheet (especially compared to other large telecoms around the world), and shareholders are likely to benefit from at least a gradually increasing dividend in the next couple years whether or not the future plans look to be “growthy” enough for the long term. The annualized yield as of the last payment at the end of August would be about 5% (Telstra, as is typical in Australia, reports results and pays a dividend twice a year, not quarterly), and they’ll next be announcing their results, and presumably the next dividend payment, in about a month (on Feb. 12).

So… sound like your kind of down-under blue chip? Let us know with a comment below.


Endnotes:
  1. Steve Sjuggerud touted it as the home of the perfect currency hedge about 15 months ago: http://www.stockgumshoe.com/reviews/true-wealth/steve-sjuggeruds-safest-currency-and-perfect-hedge/
  2. see the full thing here: http://www.investingdaily.com/plp/43225/AE-cloud.html?campaigncode=WB8196&cigx=d.kac,stid.60905,sid.210112,lid.6,mid.52855
  3. Conrad and Dittman were first touting the stock as their “cloud computing” Aussie play: http://www.stockgumshoe.com/reviews/australian-edge/this-cloud-has-a-golden-lining-and-a-9-dividend-roger-conrad/
  4. revised deal in place that Telstra says preserves the value of the NBN deal: http://www.telstra.com.au/uberprod/groups/webcontent/@corporate/@aboutus/documents/document/uberstaging_289936.pdf
  5. they’re not spending all their cash: http://www.afr.com/p/business/companies/telstra_billions_stay_in_bank_until_Oj6siG8PlyVkSLrdlLbqqM
  6. pretty good article here about Telstra’s “crossroads”: http://www.theaustralian.com.au/technology/cashedup-telstra-stuck-at-the-growth-crossroads/story-e6frgakx-1227101617806
  7. long presentations and transcripts from Telstra’s Investor Day last Fall here: http://www.telstra.com.au/uberprod/groups/webcontent/@corporate/@about/documents/document/uberstaging_286106.pdf

Source URL: https://www.stockgumshoe.com/reviews/australian-edge/whats-australias-golden-cloud/


  1. Avatar
    Julien Ayotte
    Jan 13 2015, 12:54:12 pm

    I owned Telstra years ago for the dividend yield. However, now that you have to contend with Australian withholding tax from the dividend, that 5% dividend is far less. Hardly worth the effort.

    • 12477 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Jan 13 2015, 01:11:47 pm

      Good point. It should be claimable as a foreign tax paid for US investors, at least as long as it’s not in a tax-deferred account (I’m absolutely not an expert on taxation at all, so don’t rely on my opinion), but the Aussie withholding tax is pretty high at 30%. I think Canada is still 15%, for comparison’s sake.

      • Avatar
        Dusty
        Jan 13 2015, 01:55:35 pm

        Aussie tax for US investors resident in the US with a taxable brokerage account is 15%. (Other than a few specified exceptions: research it if concerned.) The tax paid can be entered on the line on the 1040 for “Foreign Tax Paid” and then is a deduction from the amount of tax owed to the US government. Much better than a “deduction.”

        This might not work for an IRA. Canada does not withhold tax for US investors resident in the US investing through an IRA. I don’t know about Australia. There is much to be said for having an online taxable brokerage account for investments like this and for others that are tax-advantaged where the advantage is lost in an IRA or has possible complications for an IRA. Also, there is a maximum dollar limit for each IRA; if the investor reaches that maximum then any company contributions will be lost. Important to leave space for “matching” contributions (that are mostly deposited on Dec 31— on purpose. The company gets back all that exceeds the dollar limits. And puts these excess amounts that are returned into a a special account that is later distributed to top management.). Any extra money you wish can be put into the taxable brokerage account with no limits or restrictions on putting in or taking out.

        • Avatar
          tannaroo
          Jan 18 2015, 11:48:46 am

          Julien,
          My understanding is that any “franked” dividends paid by Australian companies to foreign shareholders are not subject to withholding tax. Telstra pays franked dividends so it should be withholding tax free from Australia. You might want to check with your tax advisor.

          • 1233 |
            Avatar
            Hi Pockets
            Jan 18 2015, 05:03:52 pm

            Had to google ‘Franked Dividend’. Per http://www.investopedia.com/terms/f/frankeddividend.asp

            “An arrangement in Australia that eliminates the double taxation of dividends. Dividends are dispersed with tax imputations attached to them. The shareholder is able to reduce the tax paid on the dividend by an amount equal to the tax imputation credits. Basically, taxation of dividends has been partially paid by the company issuing the dividend.
            This concept is best illustrated by an example. Suppose you receive a franked dividend of $100. Assume the before-tax value of this dividend is $125 (this will depend on the company’s rate of taxation). In other words, the company has to generate $125 of pre-tax profit to be able to disperse the dividend.

            If your marginal tax rate is 30%, you will owe $12.50 in taxes on the franked dividend (($100) -($125 * (1-.3))= $12.5). If the dividend is unfranked, you will owe $30 on the $100 dividend ($100 * (1-.7)= $30. Essentially, the company pays a portion of the tax that you would owe if the dividend was unfranked. In Australia, these taxes are paid to the Australian Tax Office (ATO).”

            To be frank [who wants to? 🙂 ], this gives me the impression that the company has to be profitable before doing this.

  2. Avatar
    Dusty
    Jan 13 2015, 01:16:24 pm

    I bought Telstra (TLSYY) early in the year; about 2% of my portfolio. I like telecoms; considered it a currency hedge; international diversification; dividend payer. My stock buys are for very long term. The price of everything goes up and down; the US Dollar gains and loses relative to the others over the long term, also. ????

    It is nice to know that one of the bigger (?) newsletters is pushing this stock. And nice to hear that The Gumshoe seems to go along with the thought that Telstra is trying to grow and to be more profitable. 🙂

    • 12477 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Jan 13 2015, 02:10:11 pm

      Hope it works out for you! “Legacy” wireline services have such a dramatically huge profit margins (compared to wireless or web services) that they’ll have to grow a LOT over time to make up for that lost “free money”, but the $11 billion from the gummint will help.

  3. Avatar
    Cathy
    Jan 13 2015, 04:12:01 pm

    Nice when someone with knowledge is able to put a perspective in there own thoughts that helps you know where you could of, or would of, or do stand, sure I am not the only one that appreciates this ,many thanks Travis and your sidekick!

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