When I started to write this article I was of the opinion that Telstra Corporation Ltd's (ASX: TLS) dividend no longer represents as attractive a deal as it once did. However, after researching the matter, my opinion has changed.
Telstra has been both criticised and congratulated for consistently handing out its 14 cents per share (cps) dividend. Consistency in an ever-changing world is endearing to many; on this front, Telstra has delivered, even through the GFC.
From April 2005 to March 2014, Telstra maintained the dividend at exactly 14cps—that's 19 times in a row it held steadfast. Some investors complain that this represents an erosion of true value as the share price rises. Is this a fair criticism?
September 2014 saw the first increase from 14cps to 15cps, and in its latest financial report, Telstra announced a further increase to 15.5cps. It is pleasant to see Telstra finally starting to raise its dividend, but is it really enough to maintain the attractiveness of this investment? Let's face it, Telstra's reliable dividend is compelling for people who need an income stream from their investments. That constant dividend is why many investors buy and hold Telstra shares in the first place.
So let's have a look at how Telstra's historical dividends fare against the target cash rate, as declared by the Reserve Bank of Australia.
Back in April 2005, when Telstra first declared its 14cps dividend, the price of a Telstra share was around $5. Considering that Telstra pays dividends twice a year, this represented a fully franked annual dividend yield of 5.6% (grossed up to include franking credits, this becomes 8%). Compared to the April 2005 target cash rate of 5.5%, an 8% yield represented good value.
September 2010 saw the most attractive dividend yield for Telstra. On that date the 14cps dividend was paid with the share price around $2.70. That represented a 7.15% grossed up yield (14.3% per annum). This far exceeded the Reserve Bank's target cash rate of 4.75%.
Today, the current share price sits around the $6.25 mark. The next dividend (of 15.5cps) represents a 3.5% grossed up yield (or 7% per annum). That is pretty much half the yield shareholders received back in 2010. But compared to the current target cash rate of 2%, the dividend looks very attractive. Actually, when compared to the target cash rate, the current dividend (a 3.5 multiple of the target cash rate) is actually better than when it was at its best yield (a 3.0 multiple).
In today's climate of low interest rates, a return of 7% per annum is exceptional. It far exceeds anything available for cash parked in a bank.
There is also the tantalising question of what Telstra plan to do with the $11 billion from its recently negotiated 'NBN Definitive Agreements'. This money starts to flow into Telstra during the 2016 financial year—30 June 2015 is when the agreement commenced. Conceivably some of this money should be distributed to shareholders. After all, it is their asset that the company has agreed to sell off.
Foolish takeaway
Telstra remains an attractive long-term investment opportunity for investors interested in dividend returns. Telstra's dividends have proven to beat the money market time after time, and should continue to do so in the future. There is also the possibility for either a special dividend, or for company growth by expansion into new areas. Let's see what management does with the $11 billion in cash it will receive from the NBN.
