Telstra chairman John Mullen has acknowledged that the end of Telstra's policy to pay almost all profits out as dividends is tough on shareholders but said he expects the company to maintain or increase the total dividend over time as earnings grow.
"Changing the dividend policy was one of the toughest decisions the board has ever had to make," Mr Mullen told shareholders at the company's annual general meeting in Melbourne.
"We spent many long hours debating it, many sleepless nights working it through in our minds, knowing full well the impact it would have on our shareholders."
The telco is seeing $3 billion of earnings taken away because of the NBN which is replacing Telstra as the monopoly wholesale provider.
In August it announced it would pay out between 70 and 90 per cent of earnings from fiscal 2018, rather than close to 100 per cent.
It was the first big change in dividend policy since the telco was floated by the government in 1997 and means shareholders will wear a 30 per cent cut in the total dividend to 22?? a share next year.
Mr Mullen said the company would not acquire businesses to replace the lost earnings as this would be too risky.
"And to expect that we can suddenly just go out and create another $3 billion EBITDA business overnight is simply just not realistic," he said.
A change needed
The dividend policy shift was "one change among many" that Telstra needed to make. "We absolutely understand and empathise with your [shareholder] concerns over the dividend," he said.
"Whether we like it or not, we have to accept the world around us has changed dramatically and Telstra is having to change just as dramatically as well."
Mr Mullen noted that the big tech giants like Amazon did not pay out dividends, because they reinvested to grow market share and reduce prices and enhance product offerings. That drove enormous share price appreciation.
He said Telstra was not about to completely ditch handing out dividends to its shareholders - in addition to the ordinary reduced dividend, Telstra intends to return around 75 per cent of net one-off NBN receipts over time through special dividends.
Australia was a yield-driven market with high payout ratios, he said. "We would never consider not paying a dividend ... but if one hadn't and had behaved the same way as some of those other companies we would have a war chest of $50 billion."
Mr Mullen also defended concerns over remuneration including Telstra chief executive Andrew Penn's pay. Mr Penn earned $2.3 million in fixed pay, a $1.49 million bonus and $1.04 million in shares, bringing his take-home pay to $5.21 million.
Angry shareholders at the meeting expressed concerns over the total package, which they viewed as excessive.
"I can assure you that the remuneration committee and board take remuneration extremely seriously," Mr Mullen said.
"We're constantly mindful of the balance between attracting the best talent but also meeting shareholder concerns and expectations over the long-term."
Mr Mullen also spoke of Telstra's new "formidable" competitor TPG, which is spending almost $2 billion to build Australia's fourth mobile network.
"We do not underestimate the impact this may have, the effect on pricing, nor the fact that we must - and most certainly will - continue to invest heavily to maintain our mobile network superiority and continue to improve the experience we offer our customers," Mr Mullen said.
Mr Penn also addressed shareholders, saying increased competition, digital disruption and the migration to the NBN would create a tough operating environment over the next two to three years.
He said the move to connect 4 million homes under the NBN needed to be faster and pricing needed to be more affordable.
NBN too slow
Consumer complaints about poor speeds have been on the rise, with some users reporting NBN is worse than previous DSL connections.
Mr Penn said wholesale broadband prices in Australia from NBN are increasing by almost 100 per cent in the migration.
"This will increase by a further 20 to 25 per cent over the next three-four years under NBN's plans," he said.
Mr Penn also spoke of the company's longer-term strategic direction, including Telstra's move to be a technology company rather than a traditional telco.
Telstra was building new skills in areas including software engineering, data science, AI and in quantum computing, he said.
Telcos had been investing tens of billions of dollars so customers can stream services such as Netflix, which was now valued at more than $US87 billion, but this value had not been captured by companies like Telstra, he said.
"That's why our vision is to become a world-class technology company that empowers people to connect," Mr Penn said.
The company booked a reduced full-year profit of $3.89 billion, compared with $5.85 billion the year before.
Telstra also confirmed its guidance for 2017-18. It expects income in the range of $28.3 billion to $30.2 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of $10.7 billion to $11.2 billion.
Telstra's share price closed flat at $3.55 on Tuesday.