Despite the well-publicised challenges that Telstra Corporation Ltd (ASX: TLS) faces right now, it could still be an opportunity – for its dividend. At today's prices, Telstra is yielding an estimated 6.7%, which grosses up to almost 10% once franking credits are included.
Not bad!
That dividend, combined with the possibility of modest growth through Telstra's mobile and smaller connectivity segments would see shareholders well-compensated for holding Telstra shares for the long term.
Additionally, as a telecom utility, Telstra also enjoys highly defensive demand – if anything, demand for data and connectivity will likely increase over the next decade, not decrease. Combined with those lucrative dividend payments, Telstra sounds like a very sensible investment.
But…
The downside is that, as many in the market have noted, Telstra's earnings have been falling, not growing, in recent times. Combined with a dividend payout ratio that is close to 100% (i.e., the company pays out almost all of its profits), and Telstra's dividends are looking a bit stretched. The company itself has indicated that it also expects to take a big hit to earnings over the next couple of years as payments for constructing the National Broadband Network (NBN) cease.
The result is that Telstra is paying out this big dividend that is equivalent to almost the entirety of its profit, at a time when profits are falling. This is not ideal for dividend holders, who could see their payments cut. However, if you factor in a cut to the dividend – say it could become 4.7% fully franked instead of 6.7% – the final compensation is still highly adequate and could prove very valuable to self-funded retirees.
There is some uncertainty regarding how big the hit to Telstra's dividend could be and, as a result, I'm not buying shares just yet. However, the company is looking interesting today's prices and is definitely on my watch-list.
