Company: Telecom New Zealand
Overview: Telecom continued its likely march towards content delivery on Wednesday when it was announced it will no longer partner with Sky TV to resell Sky TV's services. Change has typified Telecom since the privatisation of the company over 20 years ago. Having been forced by regulation and new entrants to become a far more nimble operator Telecom has morphed from a monopoly provider to a competitive incumbent.
Pros: Being the incumbent still gives the company much clout in the sector particularly the traditional home phone market where it still dominates. However, with the home phone market in decline Telecom has focused its strategy on stabilising and then growing market share in internet and mobile connections.
For Telecom to challenge Sky TV's dominance in content delivery it will require a network which allows for high speed and high definition quality content. Top quality internet delivery requires the successful completion of the ultrafast broadband project. Telecom will be hoping the recent Commerce Commission decision regarding Telecom's former business unit Chorus does not derail the rollout.
On the other hand, the decision to decrease the price Chorus can charge for copper broadband could potentially allow Telecom to increase its margins in the relatively sticky broadband connection market. Although there has been an increase in the number of smaller operators which has increased competition, the purchase of Telstra New Zealand by Vodafone consolidated the market into an effective duopoly.
Cons: The inevitable shift from traditional fixed home lines to mobile and broadband means Telecom's home line cash cow will not last forever. Telecom will have to replace the revenue currently generated by home lines by shifting focus to the more competitive mobile and internet markets. Telecom could also face difficulties in responding to changes in technology or technology obsolescence in comparison to its smaller and more nimble competitors. However, recent investment in infrastructure such as the $149 million spent in the recent digital spectrum auctions has Telecom well-placed compared to rivals.
Price performance: Since shedding the heavily regulated Chorus business unit in late 2011 Telecom's share price has appreciated 17 per cent whilst paying very competitive gross dividends of approximately 8.5 per cent.
Investment outlook: Cash-flow generation is strong and the dividend yield is excellent. Telecom, at current levels, represents good value for investors looking for a blue chip stock.
*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.
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