At today’s Telstra Corporation Ltd (ASX: TLS) share price, it offers an 8% dividend yield including the franking credits. Is it worth buying?
Telstra’s tough FY20
Last month Telstra reported its FY20 result to investors which showed that total income decreased by 5.9% to $26.2 billion.
Reported EBITDA (click here to learn what EBITDA means) was $8.9 billion. After adjusting for lease accounting changes to make the comparison on an apples to apples basis, EBITDA decreased by 0.3% to $8.4 billion.
On a guidance basis, underlying EBITDA (which assumes wholesale product price stability, no impairments or investments, excludes proceeds of asset sales and the purchase of spectrum) dropped 9.7% to $7.4 billion.
This underlying EBITDA is being affected by the shift to the NBN. Excluding the NBN headwind, underlying EBITDA – which Telstra believes this measure gives the best view of the long term business – grew by approximately $40 million. Telstra said that its underlying EBITDA was hurt by COVID-19 by approximately $200 million.
Telstra’s net profit dropped by 14.4% to $1.8 billion.
Telstra’s board decided to declare a final dividend of 8 cents per share, bringing the total dividend for FY20 to 16 cents per share. That dividend payout was the same as last year. It was attractive compared to other ASX blue chips like banks which all cut their dividends.
Is Telstra worth buying?
It’s important to remember that ASX shares are not term deposits. You can’t expect them to pay the same dividend year after year. Telstra is actually a good example of this. In 2017 it paid an annual dividend of $0.31 per share – the dividend has almost halved since then.
The dividend wasn’t cut because the Telstra board was feeling mean, it was because the company’s profit was significantly hurting. A dividend is paid out from a company’s profit. If the profit is falling then the prudent thing for the board to do is to reduce the dividend as well, unless it’s just a short term issue.
I don’t see how Telstra can be a good dividend share whilst its net profit keeps falling. Sure, Telstra seems committed to paying 8 cents per share every six months at the moment, but its share price has dropped 7%. The dividend gain has been erased by a capital decline.
In my opinion the best dividend-paying ASX shares to go for are ones that have been growing their dividends and are likely to grow profit over the long term. I don’t know how much profit Telstra will be able to make from 5G unless it can capture many more paying users from services like automated cars.