With a dividend yield over 7%, are Telstra shares a buy for income?

Are these dividends too good to ignore?

| More on:
a man looks down at his phone with a look of happy surprise on his face as though he is thrilled with good news.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Telstra Group Ltd (ASX: TLS) shares have significantly declined over the past year, dropping by 20%.

This means the Telstra share price currently offers a higher level of dividend income because the dividend yield increases when a share price falls.

Created with Highcharts 11.4.3Telstra Group PriceZoom1M3M6MYTD1Y5Y10YALL25 May 202325 May 2024Zoom ▾Jul '23Sep '23Nov '23Jan '24Mar '24May '24Jul '23Jul '23Oct '23Oct '23Jan '24Jan '24Apr '24Apr '24www.fool.com.au

After the valuation decline for the ASX telco share, let's examine what income Telstra investors are getting now.

How big is the dividend yield today?

Telstra told investors that solid cash flow conversion and generation supported "flexibility to grow dividends and invest" and that it wanted to maintain "balance sheet strength and flexibility while seeking to grow dividends".

The last two dividends declared by Telstra amounted to 17.5 cents, delivering a fully franked dividend yield of 5.1% and a grossed-up dividend yield of 7.2%.

But those dividends are history. What could the future payouts be for owners of Telstra shares?

The broker UBS has predicted Telstra could pay a dividend per share of 18 cents per share in FY24 and 19 cents per share in FY25. That translates into forward grossed-up dividend yields of 7.5% and 7.9%, respectively. That's much more than what you can get from a savings account.

But there's more to a sound investment than just the dividend yield. Ideally, I'd like to see profit growth over the longer term. Profit generation funds the dividend payments, so bigger profits can enable large payouts. Higher profits can also support a higher Telstra share price.

Are Telstra shares a buy?

Pleasingly, every six months, Telstra typically reports that it has added significant additional subscribers. In the first half of FY24, Telstra revealed that its mobile services in operation (SIO) grew by 4.6%, or 625,000 subscribers. I believe mobile subscriber growth will be the critical driver of underlying profit.

Telstra has already spent the capital on its networks and built the infrastructure. The additional subscribers can help boost revenue and margins.

The company recently acknowledged its enterprise business wasn't performing and announced job cuts in the division, with up to 2,800 roles to be removed. Most of the cuts are expected to occur by the end of the 2024 calendar year.

With those cuts and other actions, Telstra expects to achieve $350 million of its T25 cost reduction goal by the end of FY25. One-off restructuring costs are expected to be between $200 million and $250 million across FY24 and FY25.

The company has guided that its underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) for FY25 is expected to be between $8.4 billion and $8.7 billion. That would be growth compared to the guidance range for FY24 (which hasn't finished yet) of between $8.2 billion and $8.3 billion.

At this lower Telstra share price, I think it's a buy. The underlying profit and dividend are growing, and the lower valuation looks more appealing. According to UBS, the Telstra share price is valued at 19x FY24's estimated earnings.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Woman smiling whilst shopping in a clothing store.
Dividend Investing

Why this quality ASX 300 dividend stock is tipped to surge 54%

A leading fund manager forecasts significant outperformance from this quality ASX 300 dividend stock.

Read more »

Man smiling at a laptop because of a rising share price.
Dividend Investing

Why this is one of my top ASX dividend shares to buy in June

This ASX dividend share provides everything I’m looking for.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Dividend Investing

Forget Westpac and buy these ASX dividend shares

Let's see what analysts are saying about these income options.

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Dividend Investing

Brokers say Harvey Norman and these ASX dividend stocks are buys

Let's see what brokers are recommending as buys for income investors.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

Analysts say these ASX dividend stocks are top buys for income investors

Let's see which stocks are being tipped as buys.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for 4% to 11% yields

Analysts expect these buy-rated shares to offer great dividend yields.

Read more »

fingers walking up piles of coins towards bag of cash signifying asx dividend shares
Dividend Investing

I think these 2 ASX dividend stocks are buys for income in June

These businesses can provide solid income for investors.

Read more »

A businesswoman weighs up the stack of cash she receives, with the pile in one hand significantly more than the other hand.
Dividend Investing

Why I think this is the best ASX dividend share to own

This business has so many positive attributes…

Read more »