Australia’s biggest and oldest listed investment company, the Melbourne-based Australian Foundation Investment Co, has criticised the federal government’s plans to force through a structural separation of Telstra.
AFI is the second largest shareholder in Telstra.
At the company’s annual meeting in Melbourne yesterday, chairman Bruce Teele, a long standing leading member of the city’s conservative business community, argued that Telstra is entitled to get fair value for its assets and questioned the strategy’s success in other markets.
He also called on the investment company’s loyal shareholder base to make their views known to their elected representatives.
In his presentation to shareholders at the AGM, Mr Teele said there was a also danger of coercive government favouritism.
He also said the "Government’s action raises the question of sovereign risk for overseas investors" and that agreement with the Government "needs to be in the interest of shareholders".
In questioning whether the separation strategy had worked anywhere else in the world Mr Teele also asked where the cashflow to fund ongoing was.
He warned that the plan to set up a National Broadband network raised the danger of a new monopoly.
AFI is the latest in major shareholders to raise these sorts of issues: a group of mostly Sydney-based institutions have made similar comments.
AFIC directly owns $163.7 million worth of Telstra shares, but associates, Djerriwarrh Investments and Mirrabooka Investments, own a further $40 million shares.
AFIC posted a letter on its website yesterday for its 90,000 shareholders to print and send to the Federal Government. The letter claims the structural separation will penalise shareholders and set a precedent that risks the sovereignty of Australian companies.
”The government spent a great deal of time, effort and money to persuade many retail investors to participate in the three Telstra share offers,” the letter reads. ”At the time I acquired my shares in Telstra there was no prospect of the government taking such unprecedented steps to attack the company and its shareholders.”
On the company’s outlook for 2010, Mr Teele was as cautious as others in the group (Djerriwarrh Investments for example) about what’s ahead for the group (which is allied to the Goldman Sachs JBWere investment and broking house).
Mr Teele said that the "Monetary and fiscal stimulus is helping the Australian economy, however Australia is likely to be facing higher interest rates next calendar year which may impact the sustainability of growth".
He said developed economies still face major structural issues.
While Australian companies generally well positioned, he said "their outlook comments still generally subdued".
He said the company still "has some cash but we will be cautious given the recent strength of the equity market".
For shareholders though there was a warning that the company will find it hard to increase dividends in the next year or so.
Mr Teele pointed out that because of the fall in dividend income from listed companies in the 2009 year, a small part of the 2009 final dividend (was) funded from realised capital gains
"We have probably seen the low point for earnings and dividends however the recovery in dividends may lag the upturn in earnings," he said.
That’s telling us that companies will be slow to return dividends to previous levels or higher until they are convinced earnings growth can be maintained.
"Directors are conscious franking credits and LIC gains are valuable to our shareholders.
"Level of dividends paid will be assessed at the time of each result announcement," he said.
So no rush to pay higher dividends if the company can’t afford it.
AFI paid a total of 21 cents a share in the year to June.
Judging by those comments, that is unlikely to change in 2010.
AFI shares traded steady yesterday at $4.98 after touching a day’s high of $5.03.
