Telstra: A "great cash machine" in a weak economy

Despite net profits rising 31% to $2.3 billion, Telstra (ASX: TLS) has sold off following the release of earnings that arguably left analysts wanting a little more. 

Telstra had been up more than 20% year-to-date, and trading at its highest price since 2017, but was down almost 3% by lunchtime Thursday.

One big announcement was a further $1 billion share buy-back, planned to commence early next month. This follows on the heels of a separate $750 million buyback completed at the end of June. 

To make sense of the numbers and the outlook for Telstra going forward, we spoke to Hugh Giddy, IML portfolio manager.

Telstra (ASX: TLS) FY25 key results

• Underlying NPAT up 1.8% to $2.3bn vs. $2.28bn ests (0.9% beat on Macquarie estimates)
• Reported EPS up 34% to 18.9 cents per share vs. 19.95 cps ests (5.3% miss)
• Total dividend up 5.6% to 19 cents per share vs. 19.95 cps ests (4.8% miss)
• On-market buy-back of up to $1bn, expected to commence after 8 September

What was the key takeaway from this result in one sentence?

The key takeaway is the strong cash flow facilitating a bigger buyback of $1 billion that's underpinned by good cost control.

Were there any surprises in this result that you think investors need to be aware of?

I think the reason the stock is down is because TPG and Optus have already reported, and now Telstra has as well, and overall, the [telco] market seems not to be growing that much.

We've had some population growth, obviously, but in terms of additional subscriber numbers, they are maybe a little bit weaker than people were thinking. The guidance is in line with our numbers, but some analysts on the street were looking for a bit more.

Telstra I think is reasonably priced, but the broad market is very expensive. If you look at the overall market P/E, it's close to its highest level ever.

The private sector is not that strong, and you've got people excited about interest rate cuts when the only way the Reserve Bank can really justify interest rate cuts is if they're confident inflation will stay down.

It would be a big mistake for them to keep cutting and find that inflation then goes out of the band, and they've got to raise rates again.

You're also still seeing wages coming through at quite a high level, and in the non-traded part of the economy, inflation is still happening. 

Imports are quite cheap, but offsetting that, wages are too strong and there's low productivity. That puts pressure on corporates, unless they stop hiring, but that's bad for the economy and bad for profits. 

It's a circular system. Having a very high PE and some risks to the economy - that combo is not ideal for the market.