Telstra Corporation Ltd (ASX: TLS) just held its AGM and committed to paying an annual $0.16 dividend. Does that make the Telstra share price a buy?
What has been happening to the dividend recently?
Many regular investors have been attracted to Telstra over the past decade because of the dividend. However, the last few years has been pretty disappointing for shareholders focused on income. Not only has the Telstra share price been falling, but the dividend has been sinking. In 2017 it paid a fully franked dividend of $0.31 per share, in 2020 it paid a fully franked dividend of $0.16 per share. Almost a halving of the dividend.
The blame can largely be put on the shift of households to the NBN, which generates a much lower profit margin for Telstra and other telecommunications companies. The change has cost Telstra billions of dollars of profit. It is unsustainable for a business to pay a dividend of more than its profit over the longer term. That’s why Telstra had to cut the dividend.
What was said about the Telstra dividend at the AGM?
The company’s leadership has previously said that to maintain the dividend it needs to achieve underlying EBITDA (click here to learn what EBITDA means) of around $7.5 billion to $8.5 billion after the shift to the NBN is complete. Telstra is still aspiring to achieve this goal.
Telstra’s Chairman, John Mullen, said that the board is “acutely aware” of the importance of dividends to shareholders. But, there’s also the pressures of COVID-19, competition and other factors that could make Telstra cut its dividend again.
However, the board said it’s prepared to temporarily exceed its capital management framework principle of paying an ordinary dividend of 70% to 90% of underlying earnings to maintain the $0.16 dividend per share.
To decide whether to keep maintaining the dividend, the board will consider whether an underlying EBITDA of $7.5 billion to $8.5 billion is possible after the rollout of the NBN, whether the free cashflow dividend payout ratio is supportive and Telstra still has a strong financial position, and whether there are other factors that would make the payment of the dividend at that level imprudent.
The Telstra Chair was quick to say that it isn’t a guarantee of any level of dividend in the future. But it will do all it can to maintain the dividend.
So, is Telstra’s share price a buy?
There’s more to investing than just a dividend. A dividend could be worth a 5% return or 10% return in one year. But that’s no good if the share price, the capital value, falls more than the dividend return.
Telstra’s earnings continue to go backwards with more NBN connections. And COVID-19 is hurting profit even more at the moment.
The launch of the new iPhones should help boost earnings a bit. It could encourage people to sign up for 5G and Telstra will hopefully benefit from a rise in revenue from phone sales as it’s a large seller of iPhones.
What will push Telstra’s earnings higher? New telecommunications services may need strong 5G connections. But how much will people be willing to pay for that? Will the companies (like VR companies, automated car companies and others) be responsible for paying Telstra for the connections? It’s hard to say at this stage.
I don’t think the Telstra share price is a clear buy – it still has profit problems. But I don’t think it’s a ‘sell’ if you own it.