# Telstra as a Pseudo Term Deposit



## Tonester (6 January 2011)

I'm planning on using TLS as a variation on a term deposit.

With the dividend guarenteed for the next 12 (to 24?) months, the fully franked return is at 14%.  Obviously a lot higher than the going rates for term deposits, such as 6.41% through UBank.

Doing some calculations, the price would have to have dropped by 8.5% at my 38.5% tax bracket for me to 'break-even' on this play.  My rough valuations for TLS have it at almost $3 though, so I think the downside risk is small.

What are peoples thoughts on this stock specific strategy?


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## Knobby22 (6 January 2011)

Telstra now are getting an income stream from the Fed government, I think it is a very good tactic for the next 4 years. Even if the price drops a little, this helps the taxation advantage.

I agree it is a good strategy for some of your cash (maybe 1/3) assumiong you are talking over 400,000.


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## robusta (6 January 2011)

Tonester said:


> I'm planning on using TLS as a variation on a term deposit.
> 
> With the dividend guarenteed for the next 12 (to 24?) months, the fully franked return is at 14%.  Obviously a lot higher than the going rates for term deposits, such as 6.41% through UBank.
> 
> ...




Hmmmm Interesting thought. However how confident are you of TLS maintaining current payout ratio? Eventually they will have to reinvest some profits to grow the business.

Have you considered the income and tax implications of capital gains? If you can hold another company for 1 year or more and get a nice 15-20% capital gain the CGT is reduced by 50% plus you may pick up a nice 4% plus franked dividend as a bonus.


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## TabJockey (6 January 2011)

Sounds good, I did some research and fundamentally I dont think TLS has much downside from this point. I know a few guys that work for telcos and they are very bullish on the future of TLS after 2011.

Probably wont see much price action this year though!


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## So_Cynical (6 January 2011)

Tonester said:


> What are peoples thoughts on this stock specific strategy?




Your strategy makes good sense...and when Telstra was $2.58 about a month ago i would of said your strategy made very very good sense.

Good luck


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## Tysonboss1 (8 January 2011)

I sold some 3 month put options against telstra with a strike price of $2.60. If the price stays above this level I will have earned 20% in 3 months on the money I had to put up as security margin. ) win for me )

If the price falls below $2.60 and the stock is put will have bought into telstra at $2.51 after taking the option priemium into account. earning 11.1% before franking credits. ) win for me )


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## Iggy_Pop (8 January 2011)

I sold my Telstra holding a while ago, after buying at T1 and T3 and a few others on dips. My concerns is the dividend is "guarenteed"? There revenue is dropping so the only way they can keep the dividend is borrowings. Can't do that for too long. They may get something out of the NBN. 

I sold at $2.80 and put 40% into SDL, 40% into PEN and 20% into a fixed deposit. 

Since then SDL is up over 100%, PEN is also up over 100% and the Fixed deposit is 6.5%.

While I have moved into a higher risk part of the market, I am happy with the outcomes, and no longer have the frustrations of TLS.

Wish you luck with your approach and may pay off. I would split the investment across a few high dividend shares, if trying to achieve the same.


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## Tonester (8 January 2011)

Thanks for the feedback everyone

I had looked at some other securities, such as AAD, DUE and TTS to take the same approach, but I didn't feel as comfortable with these as TLS.

Also, because I'm looking at relatively small amounts, brokerage was coming into play.

I will also be gearing into the trade, probably around 50%.

I'll be getting in this week, to squeak through with the 45 day rule.

The price will have to have fallen about 5% over the year for me to break even with a TD, not taking into account the capital loss I'd then be able to claim.

I'll let you all know how I go.


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## jonojpsg (8 January 2011)

Hey Tonester

Interesting you raised this point - I am doing the same thing (for part of an investment for my dad who is also a Tonester) except using QBE instead as I thought the capital gains would outdo the difference in dividend?  Will let you know how I go also


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## brianwh (9 January 2011)

jonojpsg said:


> Hey Tonester
> 
> Interesting you raised this point - I am doing the same thing (for part of an investment for my dad who is also a Tonester) except using QBE instead as I thought the capital gains would outdo the difference in dividend?  Will let you know how I go also




Not sure how much money you guys are talking about investing but another option that pays double-digit running yields are some of the hybrids eg SVWPA, AAZPB. These are at the riskier end of the hybrids but I would have thought they are much lower risk than a serial wealth destroyer like TLS.


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## Tysonboss1 (9 January 2011)

brianwh said:


> These are at the riskier end of the hybrids but I would have thought they are much lower risk than a serial wealth destroyer like TLS.




TLS is not a serial wealth destroyer, they have not destroyed any of their value. It's just that they were well and true over priced from the IPO.

There is a common problem with human attitudes to risk assessment. 

If a stock suffers falls in value they often label it as risky and avoid it just when it is selling at levels that are extremly favourable to having solid longterm returns.

And equally if a stock has seen years of solid gains, people see this as a sound investment even though it price could be trading at quite frothy speculative levels and it is due for a large correction or a protracted period of stagnation will low dividend yields.

The old saying "buy low, sell high" is often ignored by the crowd in place of "buy high sell low", with alot of people buying stocks after they have seen gains and selling after they have seen share price declines, as graham said this is the exact opposite of sound business practice every where else

http://www.youtube.com/watch?v=nlG0VPVwTfI&feature=related

The above link would be worth while listening to.


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## brianwh (9 January 2011)

Tysonboss1 said:


> TLS is not a serial wealth destroyer, they have not destroyed any of their value. It's just that they were well and true over priced from the IPO.




An exercise in semantics Tysonboss1 surely. I suggest that almost anyone who has bought in to TLS over the years, some at prices three times the current level, would be OK with calling TLS a serial wealth destroyer.


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## Tysonboss1 (9 January 2011)

brianwh said:


> An exercise in semantics Tysonboss1 surely. I suggest that almost anyone who has bought in to TLS over the years, some at prices three times the current level, would be OK with calling TLS a serial wealth destroyer.




I would say they were responsible for destroying their own value by paying $9 for somthing that was only ever worth $3.

 It is not just semantics, companies have a true value regardless of their share price, if the directors had actually destroyed this true value then yes they are wealth destroyers, but if you over paid for it in the first place and the stock price just returned back to this true value then you are the wealth destryer, not the company or director.

The true value of Telstras assets can be measured, and does not change along with the share price.

Telstra listed on the stock market along with all the hype of the tech boom, People were willing to pay big premiums for a piece of the hype, I would say that TLS share price decline has been a long slow process of returning the stock back to levels that better reflect it's fair value. I believe it is now fair value.

Now telstras share price has not declined at the same rate as Seafood online.ltd or astroturf.com (because telstra did actually has some real assets generating cash) but the principle is the same. Tech boom turned to tech Bust and after 10 years of decline I think telstra is about fair value.

I am not a telstra spruiker, In ten years since it listed I have never bought a single stock. But it is now at levels that interest me.


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## Greedy_Kev (11 January 2011)

Tonester said:


> Thanks for the feedback everyone
> 
> I had looked at some other securities, such as AAD, DUE and TTS to take the same approach, but I didn't feel as comfortable with these as TLS.
> 
> ...




u should be careful when u go head first in dividend chasing, there is usally a good reason why the yeild is currently so high, usally because the price has suffered due to poor management.

for example u mentioned DUE - their yeild maybe 11.9% but their debt/equity ratio is 445% and interest cover is only 1.19 with such low interest cover and only 65% earning stability, there is a high default risk. they will be under pressure to repay debt holders before releasing dividends, so in the short term its unlikely they will pay u.

their liquidity is also quite low, so u may also lose out during your exit.


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## Tonester (12 February 2011)

Tonester said:


> I'll let you all know how I go.




Well about one month in and after the Telstra report, from what I've briefly read so far, there are a couple of take aways.

I definately won't be holding onto these any longer than one year.  It seems painfully clear now that there is significant borrowing to pay for the dividends that they obviously cannot maintain.

The NBN pay out will be in effect a 'get out of jail free' card.  What if this falls through?

However, the price has risen somewhat over the past month, so it's given me a nice buffer to ride out the next 11 months.


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