Telstra Corporation Ltd (ASX: TLS) has cut its dividend in the half year report to 31 December 2018, what will the share price do?

Telstra is Australia’s largest and oldest telecommunications business, having built the first telegraph line in 1854. Today, it provides more than 17 million retail mobile services, nearly 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services. It also has operations stretching across eHealth, network applications and subsea cabling. Starting in 1997 (until 2006), the Australian Government sold Telstra to Australian investors via the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.

Telstra Report and Dividend Cut

Telstra has announced a dividend cut of about 27% to 8 cents per share, down from 11 cents per share a year earlier.

Why did this happen? Earnings per share (EPS) fell by 27.8% to 10.4 cents, net profit dropped by 27.4% to $1.2 billion, EBITDA declined by 16.4% to $4.3 billion (click here to learn what EBITDA is) and total income was down 4.1% to $13.8 billion.

Telstra said that excluding the NBN and in the context of current market conditions, the underlying Telstra business performed well adding 239,000 retail postpaid services. Telstra Wholesale added 125,000 mobile services that were a mix of prepaid and postpaid. Internet of Things revenue grew by 35.6%.

On the costs side of things, Telstra managed to reduce underlying fixed costs by $162 million in the first half, which is part of a large job reduction plan.

How did Telstra calculate the dividend?

Telstra’s new policy is to pay a fully franked ordinary dividend of between 70% to 90% of underlying earnings and to return around 75% of future net one-off NBN receipts. That’s why Telstra paid an ordinary dividend of 5 cents per share and a special dividend of 3 cents per share.

Management comments

Telstra CEO Andrew Penn said: “While today’s financial results show parts of our business continue to face short-term challenges, there are positive signs particularly with the significant increase in retail postpaid mobile services.”

Will 5G Save Telstra?

Mr Penn also said that he was very confident about Telstra’s future because demand for telco products and services continues to grow and telecommunications infrastructure is only going to increase in importance over the next decade.

Telstra thinks that 5G will lead to an increase in average revenue per user (ARPU) from uptake and new services, which has happened with 4G and other Gs.

Is Telstra a buy?

Telstra said it is on track to reach its FY19 guidance of total income between $26.2 billion to $28.1 billion and EBITDA of $8.7 billion to $9.4 billion. Free cashflow is expected to be between $3.1 billion and $3.6 billion.

Assuming Telstra pays another 8 cents per share dividend in six months it now has a fully franked dividend yield of 5%.

Telstra’s future may look promising for when services like automated cars are out on the road, but until then Telstra may keep losing profit to competition from peers like TPG Telecom Ltd (ASX: TPM). For now, I don’t want to consider buying its shares until I learn about how Telstra will generate its earnings from 5G and the new services.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).