Telstra Corporation Ltd (ASX: TLS) is known as an ASX dividend share. But, after a few years of stagnant payouts, will Telstra increase the dividend in 2022?
The telco has been paying investors a relatively high dividend yield (in relation to the Telstra share price) for many years.
However, the annual Telstra dividend per share of $0.16 is now much lower than it was a few years ago. In 2017, the telco actually paid an annual dividend per share of $0.31 per share.
It has been quite a while since the telco last grew its dividend.
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Is there a dividend increase coming from Telstra?
For a number of years, Telstra had been suffering from falling profit as margins were squeezed due to the shift to the NBN for its home broadband connections.
But now the leadership are hinting at future dividend increase.
In September 2021, Telstra released its T25 strategy. Investors may remember that the T22 strategy involved cutting costs, becoming more efficient and monetising some of its assets.
Within that T25 strategy are a number of new focuses. It's looking to extend its 5G network coverage to 95% of the population. Regional coverage is going to be expanded by 100,000sq km of 4G and 5G coverage. It's aiming to increase its customer satisfaction across all of its segments, whilst growing its Telstra Plus membership to 6 million by FY25.
In terms of financial goals, Telstra is looking to find another $500 million of net fixed costs between FY23 to FY25. This could help the business with its target of a compound annual growth rate (CAGR) of mid-single digits for earnings before interest, tax, depreciation and amortisation (EBITDA), and high-teens for underlying earnings per share (EPS), to FY25.
For income-focused investors, the most interesting goal might be that Telstra is looking to maximise its fully franked dividends and "seek to grow over time".
When will those juicy dividends grow?
Telstra's management recognise the importance of the fully franked dividend. The company's intention is to return as much cashflow to shareholders that can be sustainably supported by earnings and franking, whilst also balancing the objectives and principles of the capital management framework.
It's confident in maintaining a minimum payout of $0.16 per share. However, the franking credit balance is low.
Telstra said that in FY21 it reported 15.6 cents of EPS and underlying EPS of 9.7 cents. The managing director Andrew Penn said about the dividend:
We need to grow underlying earnings with our financial ambitions, and grow our franking balance in order to grow fully franked dividends.
This replaces our previous principle to pay fully franked ordinary dividends of 70% to 90% of underlying earnings.
We have replaced this principle because we expect our cashflow to remain ahead of accounting earnings, and we are focused on growing underlying earnings into our total dividend.
On top of paying dividends to shareholders, Telstra wants to invest for growth. Organic growth opportunities could be a long-term or nation-building infrastructure investment, or a major customer project. The telco said it's exploring opportunities in those areas.
So what about 2022?
Currently, Commsec estimates show that the dividend is expected to be $0.16 per share in both FY22 and FY23.
Indeed, multiple brokers have also pencilled in a dividend of $0.16 per share for the current financial year and FY23, including Morgans, Credit Suisse and Ord Minnett.
However, looking at FY24, Commsec's estimate for FY24 is $0.17 per share. That would represent growth of 6.25% compared to the current dividend.
At the current Telstra share price, an annual dividend of $0.17 per share would be a grossed-up dividend yield of 5.8%.
