Telstra dividend lets down its shareholders

Telstra CEO Andrew Penn, Pic: Renee Nowytarger

At a stroke, Telstra CEO Andrew Penn has let down a generation of shareholders who held fast to the telco for one outstanding reason — it never cut its dividend.

But today Penn moved to do just that and automatically jeopardised the position Telstra has held since the GFC in the “core” portfolio of income-seeking investors.

The trade-off from Telstra is the promise of future share price growth. But investors looking for the promise of earnings growth — even within the confines of the telco sector — now have new choices — in particular the well-regarded TPG.

Reclassifying Telstra — post the NBN rollout — as an industrial stock rather than a dependable utility is going to be a very hard sell indeed.

Telstra’s dividend was unchanged from last year at 31 cents but the company’s forecast for the coming year’s dividend drops to 22 cents.

No wonder brokers such as Macquarie Research, who are used to selling the stock on a dividend yield of at least 5 per cent, instantly offered a sharp critique, suggesting: “We had assumed Telstra continued with high payout ratios in the near term.”

The broker went on to warn: “We will be seeking more colour on how Telstra plans to manage the 10 to 30 per cent of underlying earnings it won’t now be returning as dividends.”

Under former chairman Catherine Livingstone Telstra won the hearts of local investors for a publicly-stated resolve to be a stable income-producing stock — a policy it kept to rigidly through all challenges since 2009.

It is worth noting that at Commonwealth Bank — perhaps Telstra’s keenest rival for the support of dividend-hungry Australian investors — the latest payout has been increased by 9 cents to $4.29. (CBA is now chaired by Livingstone.). At current levels CBA is trading on a 12-month forward dividend yield of 5.37 per cent.

One-off special dividends are all very well but no substitute for a reliable dividend policy.

Australia’s big miners such as Rio Tinto know this to their cost. Rio controversially scrapped a so-called progressive dividend policy in recent times only to discover two years later that it was in a position to offer the biggest dividend in its history.

Moreover, “special dividend” arrangements make it impossible to accurately forecast dividend yields.

Ironically, many in the market have been calling for Australia’s top companies to invest in future growth in exchange for high dividend policies. But Telstra would have been forgiven for being among the last, rather than the first in line.