Telstra Corporation Ltd (ASX: TLS) shareholders can expect to receive their half-year dividend of eight cents per share (cps) to be paid on 29 March 2019.
Should they reinvest into the company’s dividend reinvestment plan?
I wouldn’t.
Why Not?
With Telstra’s earnings expected to fall along with their dividends possibly cut again, reinvesting dividends into a company that is struggling to maintain its earnings and dividends doesn’t make any sense. Especially with increased competition from TPG Telecom Ltd (ASX: TPM) in the mobile space which is their current crown jewel after losing the copper cable network.
Telstra’s half-year dividend is made up of five cents, reflecting 70-90% of underlying earnings, and three cents reflecting 75% of one-off NBN receipts. Therefore, in the future, Telstra shareholders could expect to receive dividends in the range of 10-12 cents if half-year earnings were to remain steady into the foreseeable future after one-off NBN receipts cease.
On a share price of $3.30 at the time of writing, this would represent a dividend yield of 3.0-3.6%, or 4.3-5.2% with franking credits attached. Add in the prospect of capital gains looking slim with profits forecast to shrink in the future and it is an unappealing investment in my books.
Telstra’s Debt
Another unappealing aspect of Telstra to me is its debt, with its net debt at 31 December 2018 being $15.8 billion with a gearing ratio at 52.25%. While some people would be comfortable with this, it’s a little too high for me.
It also helps Telstra boost its return on equity and a better gauge in this situation would be the return on capital (ROIC). Telstra’s return on capital has declined from a high of 20% over the last 10 years to a low of 14% and I would not be surprised to see that continue trending downwards in the future.
What’s The Alternative?
An ETF that tracks the ASX 200 (INDEXASX: XJO)(^AXJO) is currently yielding a little over ~4% on a trailing basis, or a touch over 5.5% with franking credits included. With a dividend yield that is likely to match or rival Telstra in the near future, plus the better potential for capitals gains over the long run, I know where I’d invest my dividends (and money)!
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