Telstra Corporation Ltd (ASX: TLS) is Australia's largest telecommunications company and has been a dividend favourite for shareholders since 2007. Who could say no to those juicy fully franked dividends?
It has been a dependable stock, but I think now is the right time to sell for three reasons:
Loss of economic moat
Telstra used to have a significant advantage over competitors by owning all of the copper networks, allowing it to charge rivals for use.
However, now that the NBN Co owns the infrastructure, Telstra is on a level playing field with everyone else who are offering cheaper deals.
Unless Telstra lowers its prices, it could lose market share to TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) – either way it's likely to be a bad outcome for Telstra over time.
Big hit to future profits
Management has flagged that it will be spending $3 billion over the coming years, including $500 million to improve customer service and $1.5 billion to improve infrastructure. This might be good for customers, but it will be a serious drag on future profits.
The only way to compensate will be to generate more revenue, which will be difficult because of competition and my third reason below.
Almost unsustainable payout ratio
In FY16 Telstra paid out 98% of its profits as a dividend. When the business isn't keeping much to re-invest back into itself, it will find it difficult to fund new initiatives as well as maintaining the dividend in a bad year.
The looming hit to profit will either mean Telstra will have to reduce the dividend or take on more debt to pay the dividend, which would be a negative for Telstra's balance sheet and therefore the share price.
Foolish takeaway
I think now is the right time to sell your Telstra shares as I don't think it will produce much growth for several years.
Telstra isn't the only share you should sell; these three stocks should also be on the offload list as soon as possible.
