Telkom SA SOC's (JSE:TKG): Balancing Earnings Growth and Total Shareholder Returns in a Shifting Landscape

The interplay between earnings growth and total shareholder returns (TSR) has long been a focal point for investors seeking to balance short-term gains with long-term sustainability. Telkom SA SOC (JSE:TKG), South Africa's largest telecommunications provider, presents a compelling case study. While the company has delivered robust TSR in recent years, analysts and investors must now grapple with whether this performance can endure amid slowing earnings and revenue forecasts.

Recent Financial Performance: A Data-Driven Turnaround

Telkom's strategic pivot to a data-led business model has yielded tangible results. For the first half of fiscal year 2026 (H1 FY2026), group revenue rose by 3.4% to R22.104 billion, driven by a 7.9% increase in data revenue to R13.072 billion, now accounting for nearly 59% of total revenue. EBITDA expanded by 7.4% to R6.023 billion, with margins widening to 27.2%, reflecting disciplined cost management. Mobile data subscribers surged by 26.7% to 18.5 million, and fibre connectivity rates improved to 52.0%, underscoring the company's infrastructure investments. Headline earnings per share (HEPS) climbed 16.4% to 305.6 cents, supported by operational efficiency and cost savings.

These figures highlight Telkom's ability to adapt to evolving market demands. However, the broader context reveals a more nuanced picture. For FY2025, group EBITDA grew by 25.1% to R11.8 billion, and free cash flow surged 555.2% to R2.8 billion. While these results are impressive, they contrast sharply with analyst forecasts projecting a 7.1% annual decline in earnings and 3.1% revenue growth for the coming years.

Total Shareholder Returns: A Dividend-Driven Success

Telkom's TSR has outperformed its earnings trajectory. Over the past year, shareholders enjoyed a 76% return, driven largely by dividends. The three-year TSR of 100% further underscores the company's commitment to returning value to investors, outpacing the 90% share price return during the same period. This performance is particularly notable given the company's ownership structure, with 41% of shares held by public entities and 36% by institutions. Such a stakeholder composition suggests that dividend policies and capital allocation decisions are closely scrutinized, potentially limiting flexibility in response to market shifts.

Sustainability Challenges: Earnings Slowdown and Margin Pressures

The sustainability of Telkom's TSR hinges on its ability to maintain dividend payouts and operational efficiency amid slowing earnings growth. Analysts caution that while revenue is expected to grow at a modest 3.1% annually, earnings are forecast to decline by 7.1% per year. This divergence signals potential margin compression, particularly as the company invests in seasonal initiatives and expands its data infrastructure.

A critical factor is Telkom's free cash flow, which stood at R724 million in H1 FY2026. While this figure demonstrates disciplined cash generation, it pales in comparison to the R2.8 billion recorded in FY2025. If earnings and revenue growth continue to decelerate, sustaining dividend payouts-let alone increasing them-could become challenging. This risk is compounded by the company's reliance on capital-intensive investments in fibre and mobile networks, which may strain cash reserves in the medium term.

Strategic Resilience: Can Telkom Adapt?

Telkom's long-term sustainability will depend on its ability to balance growth investments with profitability. The company's data-led strategy has already proven effective in diversifying revenue streams, with data now accounting for nearly 60% of total revenue. Continued expansion in fibre connectivity and mobile data services could offset slower growth in traditional segments. However, this requires sustained capital expenditure and operational efficiency, which may be harder to achieve as earnings forecasts weaken.

Moreover, Telkom's ownership structure introduces an element of political and policy risk. As a state-owned enterprise with significant public ownership, the company's strategic direction is often influenced by broader government priorities. While this can provide stability, it may also limit agility in responding to market dynamics. Investors must weigh these factors against the company's historical resilience and its track record of delivering strong TSR.

Conclusion: A Delicate Equilibrium

Telkom SA SOC's recent performance demonstrates the power of strategic reinvention, with data-driven growth and disciplined cost management driving robust TSR. However, the sustainability of these returns is now in question as earnings and revenue forecasts slow. While the company's ownership structure and dividend policies have historically supported shareholder value, they also introduce constraints that could hinder adaptability. For investors, the key will be monitoring Telkom's ability to balance capital allocation, operational efficiency, and stakeholder expectations in an increasingly competitive and capital-intensive industry.