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[1] for his Australian Edge[2] 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[3], uranium[4], LNG or other natural resources projects in Australia. (I don’t think I’ve looked at the Lucky Country much since Steve Sjuggerud[5] touted it as the home of the perfect currency hedge about 15 months ago… 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[6]) 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[7] was still working at Investing Daily[8] 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).

And it has done pretty well in the three years since Conrad and Dittman were first touting the stock as their “cloud computing[9]” Aussie play — 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[10], 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)[11] 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[12] 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[13] (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[14] just yet). There’s a pretty good article here about Telstra’s “crossroads”[15] — 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[16] 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.

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