Speculation that Telstra Corporation Ltd (ASX: TLS) may cut its dividend made the news earlier this week after the telco told shareholders to expect an operating profit of around $10.1 billion.

In an ASX announcement on Monday, Telstra provided a trading update for its third quarter and the execution of its strategy.

“Telstra has re-affirmed guidance consistent with its FY18 guidance,” the announcement read. “However, EBITDA is expected to be at the bottom end of the range and free cashflow is expected to be at the top end to moderately above.”

The previous guidance given to Telstra shareholders was for earnings before interest, taxes, depreciation and amortisation (EBITDA) to be between $10.1 billion and $10.6 billion.

What’s Going On In With The NBN and Mobile?

Telstra said its revenue would hold firm between $27.6 billion and $29.5 billion for the full year but a squeeze in mobile and broadband (thanks to the NBN) would hurt margins. Telstra added 60,000 new mobile subscribers but its average revenue per user fell.

“We are seeing data volumes increase 50% per annum across both fixed and mobile networks and the range of services supported by our networks increase dramatically,” Telstra CEO Andrew Penn said from Boston.

Mr Penn pointed to the rapidly shifting communications landscape, which includes the rollout of 5G networks.

“…as an industry we are in a transition to the next generation of technology as we move to software defined networks, network function virtualisation and 5G,” Penn said.

The rollout of the NBN is supposed to level the playing field for consumers and provide faster speeds to households and businesses. Download speeds of around 25 megabits per second should be accessible.

However, the rollout of 5G mobile networks has long been regarded as a key potential driver for earnings in the post-NBN world, with speeds touted to reach almost 1Gbps (1,000 megabits). Telstra, the network operator with the widest reach and most subscribers, could have been expected to benefit from the eventual switch back to mobile or even ‘all mobile’ households.

But players like Vodafone, Optus and TPG Telecom Ltd (ASX: TPG) are turning up the heat with an added layer of competition. For example, TPG is busy rolling out its own 5G mobile network in densely populated areas.

Last week, TPG announced it would offer customers a free six month plan with unlimited data (although speeds would be capped). After that, customers would be charged $9.99 per month.

Dividend Cuts A’hoy?

Telstra also confirmed its forecast for free cash flow would be at the top end of its previous range, around $4.7 billion. It also confirmed that total dividends for the current financial year would be 22 cents per share.

But with concerns over competition and margin compression mounting some analysts and investors were concerned.

At the JP Morgan Conference in Boston, CEO Andrew Penn was probed on potential dividend cuts.

“You know clearly we have confirmed our guidance for dividend this year at 22 cents and ultimately our ability to pay dividend obviously will be a function of the performance of the business and that’s going to be impacted by obviously the market dynamics.”

“I note we have over the last couple of years returned significant amount by virtue, by way of dividends as well as on market and off market buybacks so we have a history of doing capital management initiatives to make sure that we manage the balance sheet as effectively as possible.”

“The other thing that we are always very cognisant of is to return franking credits which possibly are less well known here in the U.S. but are very important in Australia and we do our best to make sure we return franking credits which are valuable to shareholders as quickly as we possibly can.”

According to Fairfax Media, Citi analyst David Kaynes believes Telstra needs to take, “quick, drastic action in order to lower the earnings decline and minimise the next dividend cut.”

Alas, for now it seems the jury is out on Telstra’s dividend and investors will have to wait until August to hear what the board thinks of the current policy during the annual results presentation.

Are you interested in finance and investing?

Did you know it’s free to join The Rask Group’s Investor Club Newsletter? It’s a regular (usually weekly) news and educational update on financial markets, investing and unique strategies. Join today and get ready to laugh and learn.

Click here to join The Rask Group’s Investor Club Newsletter Today

It doesn’t cost a thing to join.