Long-term capital management
Telecom’s principal sources of liquidity are operating cash flows and external borrowing from established debt programmes and bank facilities.
Telecom demerged Chorus into a separate listed entity effective 1 December 2011. Post the demerger the Telecom board continues to be committed to Telecom maintaining an ‘A band’ credit rating and its capital management policies are designed to ensure this objective is met. To that end, Telecom intends to manage its debt levels to ensure that the ratio of net interest bearing debt (inclusive of associated derivatives) to EBITDA does not materially exceed 1.1 times on a long run basis, which for credit ratings agency purposes equates approximately to debt to EBITDA of 1.5 times. The difference between these two ratios is primarily due to the capitalisation of operating leases.
As at 30 June 2012, Telecom had been assigned a credit rating of A-/Stable by Standard & Poor’s and A3/Stable by Moody’s Investor Services.
Telecom has previously announced its intention to conduct an on-market buyback to acquire a maximum of 200 million ordinary shares for an aggregate purchase price of not more than NZ$300 million.
The buyback will return capital deemed surplus to existing requirements and will result in a gearing ratio that is more consistent with Telecom’s long-term capital management policies.
At 30 June 2012, Telecom had purchased approximately 69 million shares at a cost of $169 million (representing an average buyback price of $2.46), meaning that the on-market buyback is approximately 56% complete.
For FY12 Telecom has continued with the existing dividend policy, to target a payout ratio of approximately 90% of adjusted net earnings, subject to there being no material adverse changes in circumstances or operating outlook.
In FY12 Telecom has shifted to paying dividends on a semi-annual basis. In accordance with this approach, a dividend of 11.0 cents per share has been declared for H2 FY12. This dividend will be partially imputed at the rate of 3.2083 imputation credits per share (which equates to 75% imputation based on the current corporate tax rate). Supplementary dividends paid to non resident shareholders will correspondingly be reduced on a pro-rata basis.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan has been retained. For the H2 FY12 dividend, shares issued under the Dividend Reinvestment Plan will be issued at the prevailing market price applied to ordinary shares. The last date for shareholders to elect to participate in the Dividend Reinvestment Plan for the H2 FY12 dividend is 21 September 2012.
For the H1 FY12 dividend Telecom acquired an equivalent number of ordinary shares on-market, to those issued under the Dividend Reinvestment Plan. For the H2 FY12 dividend Telecom will not acquire an equivalent number of shares to those issued under the Dividend Reinvestment Plan. These mechanisms will be reviewed at each dividend date.
FY13 Dividend Policy
For FY13, Telecom will continue with the existing dividend policy of targeting a payout ratio of approximately 90% of adjusted net earnings, subject to there being no material adverse changes in circumstances or operating outlook. Dividends will continue to be paid on a semi-annual basis.
It is currently anticipated that the FY13 dividend will be partially imputed in the range of 70% to 100% of the corporate tax rate, although this prediction is highly sensitive to a number of factors. To the extent that dividends are not fully imputed, the amount of any supplementary dividend declared will be reduced on a pro-rata basis.