Telstra's Dual-Pronged Capital Return Strategy: Buybacks and Dividends in a High-Yield Landscape

In an era where income-focused investors are increasingly drawn to high-yield equities, Telstra Group Limited (ASX: TLS) has emerged as a compelling case study. The Australian telecommunications giant has adopted a dual-pronged strategy to return capital to shareholders: aggressive share buybacks and a resilient dividend policy. This approach, underpinned by disciplined cost management and strategic leverage, raises critical questions about its sustainability in a slowing growth environment.

Earnings Growth: The Engine Behind Capital Returns

Telstra's financial performance in recent years has laid the groundwork for its capital return initiatives. Between FY2024 and FY2025, the company's net profit after tax (NPAT) surged from $1.622 billion to an estimated $2.277 billion, a 40.4% increase. This growth, driven by disciplined operations and enhanced customer engagement, has provided the liquidity needed to fund a $1.35 billion on-market share buyback program announced in February 2025. By April 2025, Telstra had already repurchased 67.8 million shares, with daily repurchases averaging over 5 million shares.

The buyback program is not an isolated event but part of a broader capital allocation framework. Telstra's debt-to-EBITDA ratio of 1.9x as of H1 FY25 remains within its target range of 1.5–2.0x, suggesting the company is balancing leverage with financial flexibility. This prudence is critical in a slowing growth environment, where excessive debt could strain cash flows.

Dividend Policy: A 4.59% Yield in a Competitive Landscape

Telstra's dividend strategy complements its buyback efforts. The company has maintained a fully franked dividend of 9.5¢ per share since 2024, yielding 4.59% at its current share price of $4.15. This yield outpaces peers like TPG Telecom (3.97%) and positions Telstra as a top-tier income stock in the telecommunications sector. However, historical volatility in its dividend—such as the 4.5% annual decline from 2015 to 2024—raises concerns about sustainability.

The 2025 dividend increase, while modest, is supported by a projected 54.2% earnings per share (EPS) growth for FY2026. If this trend continues, Telstra's payout ratio of 75% could become more sustainable. For now, investors must weigh the company's current financial strength against its past struggles with dividend cuts.

Strategic Leverage and Risk Mitigation

Telstra's decision to raise its net debt target to 1.75–2.25x EBITDA by 2030 reflects confidence in its cash flow resilience. The company has already reduced annual fixed costs by $3 billion since 2018 and plans to streamline operations further through divestments and redundancies. These measures aim to boost return on invested capital to 10% by 2030, up from 8% currently.

However, higher leverage introduces risks. A slowdown in earnings growth or a rise in interest rates could strain Telstra's balance sheet. The company's A-band credit rating, while robust, hinges on maintaining disciplined capital allocation. Investors should monitor its debt-to-EBITDA trajectory and cash flow generation as key indicators of sustainability.

Investment Implications and Recommendations

For income-focused investors, Telstra's 4.59% yield and buyback program offer immediate appeal. The company's strategic use of earnings growth to fund capital returns aligns with long-term value creation, particularly in a sector where cash flow predictability is paramount. However, the dual risks of historical dividend volatility and increased leverage warrant caution.

Actionable Advice:
1. Diversify Exposure: While Telstra's yield is attractive, investors should balance their portfolios with lower-volatility equities to mitigate sector-specific risks.
2. Monitor Financial Metrics: Track Telstra's debt-to-EBITDA ratio and free cash flow generation to assess the sustainability of its capital return strategy.
3. Consider the Dividend Reinvestment Plan (DRP): For long-term holders, reinvesting dividends could amplify returns as the company's EPS grows post-buyback.

In conclusion, Telstra's dual-pronged strategy of buybacks and dividends is a calculated response to a high-yield landscape. While its financial health and disciplined approach provide a strong foundation, investors must remain vigilant about macroeconomic headwinds and the company's historical dividend volatility. For those willing to accept moderate risk, Telstra offers a compelling blend of income and growth potential in a slowing global economy.