Weighing the price of separation

Weighing the price of separation

Summary: A reader suggested a key test to structural separation to compare shareholder return for BT with that of Telstra, providing a presumptive analysis of whether separation was a Good Thing or a Bad Thing. This was a great idea that I had to try.


Several weeks ago, I highlighted that structural separation did not "limit future innovation" for BT, despite Telstra's best efforts to persuade us otherwise.

One reader suggested a key test would be to compare shareholder return for BT with that of Telstra, providing a presumptive analysis of whether separation was a Good Thing or a Bad Thing.

This was a great idea, especially since it was already on my radar for upcoming columns. So, here goes.

Finding information about BT's performance over time is dead easy: the company runs a comprehensive Investor Centre where just about any number you care to find, can be found.

Of particular interest is the record of BT's payments of shareholder dividends, which is a bottom-line metric that, I think we can all agree, gauges how well the company has done over time.

As it turns out, this week BT shareholders are receiving a 10.4 pence dividend per share, based on a record date of 22 August and following on from an interim dividend of 5.4p, which was made back in February and based on a record date of 28 December. That's a final return of 15.8p per share for the full year.

This is the highest dividend paid since 1999/2000, when the internet was young and a glut of telecoms investment led to a dividend of 21.9p per share. Dividends evaporated during 2001, with the dotcom implosion and September 11 attacks rocking economic foundations and pushing BT's dividends down to just 2p in 2001/2002. BT slowly recovered — to 6.5p in 2002/2003, 8.5p in 2003/2004, and 10.4p in 2004/2005.

Then in 2005, disaster struck — or so opponents of separation would have us believe — when the company was separated by the government. Yet the company's shareholders wouldn't have noticed: dividends rose to 11.9p in 2005/2006, 15.1p in 2006/2007, and the current levels of 15.8p for the year that just finished.

I'm not a shareholder of BT, but if I were, I wouldn't exactly be complaining about what seems to be a steady pattern of growth that is delivering the highest returns in nearly 10 years — in an environment that has become the global gold standard for separation.

Now, I know directors have been known to play tricks with dividends to convince investors the company is doing better than it really is. Were BT's directors playing tricks, perhaps — increasing dividends as a smokescreen to disguise the havoc separation had played with their profits? I'm thinking not so much.

Here's what BT's business generated, before and after separation:

Earnings per share
Dividend per share
Broadband users
2007/8 £20.704b 2% £2.506b Flat 23.9p 15.8p 12.7m
2006/7 £20.223b 4% £2.495b 15% 22.7p 15.1p 10.7m
2005/6 £19.51b 6% £2.177b 5% 19.5p 11.9p 7.9m
2004/5 (separation) £18.623b 1% £2.085b 4% 18.1p 10.4p 5m
2003/4 £18.519b 1% £1.417b 53% 16.4p 8.5p N/A
2002/3 £18.727b 2% £3.000b 12% 14.3p 6.5p 800,000
2001/2 (mmO2 demerger) £18.447b 8% £2.663b 12% 2p Nil N/A
2000/1 £17.141b (8%) £2.506b 22% (25.7p) 7.8p N/A
1999/2000 £18.715b N/A £2.055b N/A 31.7p 21.9p N/A

Now, I'm no financial analyst, but it seems to me that the biggest change to BT's operations came when — on the back of a suddenly flaccid global telecoms market and massive debt from enthusiastic overbidding on 3G spectrum — the company demerged several of its non-UK mobile interests, began trimming excess business operations, and rooting out inefficiencies in its operations.

Whether it did this because it had to, or because it wanted to, is another matter. Since separation and the shift to a more open structure, BT's profit growth hasn't been all that bad. Revenues are up, dividends are up. And, if you look at figures such as free cash flow, it does indeed seem that BT is investing heavily in its network — or, perhaps, in a share buyback program designed to prop up the price of its shares.

Those of you with stronger financial analysis credentials than I, are welcome to debate the figures below. However, I think it's safe to say that separation has hardly spoiled the party for BT shareholders.

Now, on to Telstra
Like BT and many other companies, Telstra also has a page dedicated to trumpeting its share price results. As of this week, the company's shares were sitting at around $4.25 each. This is around half the price the shares were fetching when they first issued back in 1999. If you go to the share price page and change the "from" date to 1999, you'll see that Telstra's shares moved steadily down from 1999 to 2003, and have hovered just north of $4 ever since — except for a year-long dip below $4 during 2006.

Now, on to the shareholder's perspective. Telstra's dividend history page tells us that the company has paid regular dividends to investors — so regular, in fact, that it has paid 14 cents per share for each half since the beginning of 2006. Dividends for the second half of 2008 were paid this week, putting an initial 14 cents per share in the pocket of each investor.

Compare yearly dividends and you see little change: in 2000, investors reaped 18 cents per share. In 2001, it was 19 cents. In 2004, it was 16 cents. In 2005, it was 20 cents. In 2006, 2007 and 2008, it was 28 cents — which it should be, given that Telstra is taking more money out of Australia's businesses and consumers than ever before.

Telstra has an earnings-to-dividends ratio of around two-and-a-bit to one: in 2006 it was 2.2; 2005, 2.1; 2004, 3.1; 2003, 2.6; and 2002, 3.35. BT's ratio, by comparison, was 1.5, 1.6, 1.7, 1.9, and 2.2 for the same years, respectively.

In other words, BT is returning more of its earnings to shareholders than Telstra.

A full analysis would of course involve analysing the percentage returns to investors, and anybody whose head isn't already spinning is welcome to do so. But if we go back to the question of whether separation has damaged BT's attractiveness as an investment for shareholders, my feeling is that it has not.

What's yours?

Topics: Government, Emerging Tech, Government AU, Telcos, Telstra


Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.


Log in or register to join the discussion
  • Boring...

    As Dr Phil says...

    "That's what structural separation is. It is an idea whose time came back in the 80s, and the government passed up the chance to do it when they sold off the company to 1.4 million shareholders."
  • Like you said

    "I'm no financial analyst"

    And it really shows.

    Now it's time to admit you are also not many other things ... including:
    A decent reporter
    Fair and impartial
    someone that has any real understanding of the industry.

    You deleted an old post of mine saying the same thins, lets see if this one somehow disappears from this "two way conversation"
  • Telstra Boy Ho!

    this could make for some kind of gangsta flick the way the telstra homies run for their guns, i mean, david here has come to his own conclusion based on the facts he see's, what he's invited you to do is provide your own interpratation of the figures "What's yours?" so screw the flame war, provide your damn opinion on the figures and then shut up, read what others think and hopefully learn something...
  • Biased B.S.

    Greatest amount of jumbled rubbish I have ever read. Won't even bother to shoot it down in flames as only a demented idiot would even bother to consider its content as fact.
  • Waste of time

    I can not beleive I read this...personally, I don't think Sol will aggree to separation and therefpre we probably won'thave a network for another 5 years.
  • Demented Idiot?

    How is David biased Sydney?

    These look like well-researched facts to me, coupled with an open invitation for a considered and (thanks to the research) better educated debate on them.

    If you're just going to come on to ZDNet and slam abuse at anybody who dares question your employer, quite frankly you are not welcome here. Go back to nowweretalking.com
  • Typical Sydney

    Typical empty response from Sydney. No substance. The only thing missing is the normal Telstra rhetoric that accompanies your posts.
    The article was full of irrefutable fact. These facts are public record. All you can match that with, at best, is Sols's spin telling you that separation is bad mmmmmk. No fact, just empty spin.
    If you want to see jumbled rubbish Sydney, you should re-read your posts in various forums. Demented idiot indeed.
  • IT's NOT...

    ...a waste of time John, if your referring to David's summation of BT & Telstras' performance!
    It seems to me, David has put the ball squarely in the court of all the Telstra trolls. Lets see them argue their case with facts & figures, instead of hot air & bombast.

    As for Sol.. he should go back to his beloved USA, now wallowing in financial ruin due to the greed of those like him. I'll bet Phil wishes he was back here! It would be a gravy train compared to his homecoming.

    Sol & his yes men, will drag the NBN kicking & screaming through the courts & in defiance of government directives, IF he doesn't get his way.

    Guess who'll suffer (like all US tax payers, thanks to their greedy, shonky, devious, immoral exec's)... all Australians. We don't need him.

    ...*sigh* will it ever end?
  • Before & after

    So what you are saying is that the dividends and earnings before they split was 25% higher then they are today 9 years later.

    How does that show that BT is stronger and better off today then they were then?
  • First James Bell and now Keith Styles

    Blaming the US economy on telco greed and those who run them. You high horse seems to be giving you nose bleeds.
  • Data interpretation

    Time and again you see examples of how selective use of data can seemingly be effective in reinforcing one's perspective.
    David, i noticed that you made no mention of BT's share price performance post 1998/99. Nor did you mention Telstra's revenue and/or profit growth since the appointment of the Amigo's.
    I'm not suggesting you're right or wrong, just that data representation does not always equate to objectivity
  • Whats the point !

    Your right Arthur, but seriously there is no point in explaining as David and the others are deliberately not listening and are not interested.

    David' own narrow figures clearly show Seperation is bad for shareholders but the other finance stats he does'nt show make the case even more damning.

    Whoever is interested in Seperation, (operational or structural) be advised for whatever perverted, stupid or failed competitors communist subsidy reason they care to believe in, as shareholder I will possibly agree for a BIG FAT CHEQUE that will still only partly cover the price shareholders paid to BUY it from the govt.
  • @telstra boy and you terria girl

    dear halfwit. if you can read please do so at the top of the page. it says, next to the picture of ace journalist, haha, david, we ask you not to pull any punches, we wont. so stop your sobbing little girl.
  • @first james

    agreed. keith is just another clone from the moron factory known as tttt.
  • @demented

    go back to nwat, did you learn that from james, robbie? whos a clever boy.
  • Typical spinmakes me dizzy

    once again tell us why you hate telstra. oh thats right because you made a sarcastic remark on nwat and that big bad mr bruem replied and made you look foolish. i bet that wasnt hard.
  • lol perhaps

    data is objective, it's not as if its got the brains to be anything else, how people interpret the data, well thats another matter >.<

    Itwould be interesting to see people provide their opinion on the data, rather than attacking each other? theres 100 other tesltra related topics i could read for that
  • Not what I saw?

    Not sure where that came from Arthur, from what I could see in the table, dividends and earnings are the highest now that they have been since 1999/2000 -- the intervening years saw a steady decline in both measures until separation was enforced, then they have both rebounded since.

    Now, sceptics might say BT had gone into slowdown mode and done a Telstra by throttling back investment until it had 'regulatory certainty', but that wouldn't make sense financially. I suspect the telco malaise of the early part of the decade also had a significant role in this slowdown.
  • To what am I not listening, please?

    Could you perhaps clarify the statement that my "narrow figures clearly show separation is bad for shareholders"? In what way?

    Because I'm not a shareholder of either company, but on the surface it appears that getting more dividends per share is better than getting less dividends. If I'm missing something, do please share with the class.
  • Boys, girls, take a breath and count to 10!

    We are all very fired up aren't we? You'd think I had asked something hugely contention, which was better on bread -- peanut butter or chocolate.

    But no, I have just presented some figures, shared my opinion, and would welcome those of others.

    The real question is not who can insult whom the best; the real question is: can we believe what Telstra is telling us about the effect of separation? Because BT says Telstra is wrong, and from what I can tell in their figures it seems like BT is right that Telstra is wrong.

    So, anybody who thinks Telstra is right and BT is wrong -- could you please share your (well-considered) thoughts as to why this might be the case? Because when real people are investing thousands of their hard-earned dollars, they need to base the decision on real facts, not just empty rhetoric of the kind that has typified this whole separation debate.