Telstra dividend promise at risk, as shares slide below $3

Telstra shares have dived a further 5pc, as analysts warn it could struggle to maintain its 22c per share dividend pledge.

Telstra earnings are shrinking in the face of increased mobile competition and the impact of the NBN. Pic: Getty

Telstra shares have dived below the $3 mark for the first time in seven years, with analysts warning that the telco is going to struggle to maintain its 22 cents per share dividend promise to shareholders.

Telstra shares, which fell 5 per cent on the back of a revised earnings guidance yesterday, tanked another 5.43 per cent in late afternoon trade to $2.89, taking the amont of market value wiped out over the past two sessions close to $4 billion.

With an ultra-competitive mobile market and the ongoing, destructive impact of the National Broadband Network on its fixed line earnings, analysts are concerned that Telstra’s core business is sliding faster than expected.

According to Citi analyst David Kaynes, Telstra’s senior management needs to take dramatic action to stop the rot.

“We see limited scope for revenue growth in core businesses and Telstra could instead consider more aggressive cost-cutting and asset sales,” he told clients in a note today.

“The acceleration in the core business decline means that we no longer believe Telstra can generate sufficient earnings to maintain a 22 cents dividend in both FY19 & FY20 without breaching the upper limits of the payout ratios in its capital management framework.”

Citi has cut Telstra’s target price by 13 per cent to $2.70 a share and net profit after tax (NPAT) forecasts by -5-6 per cent.

Mr Kaynes has also downplayed the potential of 5G technology and further cuts to NBN wholesale prices delivering any meaningful boost to Telstra’s margins.

While the deployment of 5G technology will help Telstra cut costs, according to Mr Kaynes, it’s “no panacea” for the telco.

“We see 5G providing cost savings due to efficiency gains over 4G, in the current competitive environment this simply allows for continued data limit growth rather than improved profitability,” he said.

Telstra (TLS) could potentially use 5G technology to bypass the NBN altogether and save money, but Mr Kaynes said the move could put the telco’s fixed business under even more pressure.

“While 5G potentially allows for fixed line substitution, particularly for low-end users, the recent introduction of unlimited mobile plans suggests that we may simply see cancellation of fixed broadband services as customers switch to unlimited mobile offers and pay for one mobile service rather than the current trend of fixed broadband and mobile,” he said.

Meanwhile, the post-NBN world, even with further cuts to wholesale prices that Telstra will have to pay to NBN Co, doesn’t augur well for Telstra’s bottom line.

Telstra CEO Andrew Penn. Pic: Aaron Francis

Telstra boss Andrew Penn has been pushing for wider cuts to NBN wholesale prices and warned in April that wholesale broadband prices have more than doubled since customers started to migrate to the NBN and are set to increase even further.

He added that at some point retail service providers (RSPs) will have to pass the costs on to end users.

However, with 180 RSPs competing in the NBN market, Mr Kaynes said Telstra can’t afford to raise retail prices nor can it pocket the benefits if NBN Co chooses to cut wholesale prices.

“The market is simply too competitive to allow for margin relief for RSPs in our view,” he said.

“While the four big telcos still dominate the market, it is the long tail of RSPs that is winning market share, rising from 5 per cent in 2013, to just over 9 per cent today.”

Meanwhile, Macquarie analysts have pegged Telstra’s dividend payments to fall to 20 cents a share next year on the back of the weaker earnings outlook.

“While Telstra could use NBN one-off payments to sustain the current 22cps level for the next few years under its current policy, we think the increasing pressures on the business introduces scope for a more conservative view being taken on the long-term dividend outlook.”

UBS analyst Eric Choi is less bearish in his outlook, telling clients that Telstra can hold the line on dividends for a bit longer.

“FY18 and FY19 22 cents dividend per share (DPS) look safe, and there is room to play with the one-off ‘75 per cent’ DPS payout over time’ — if Telstra decided to keep the FY20 DPS at 22 cents.”

Telstra is set to update the market in June on additional measures it has planned to tackle the ongoing erosion of its earnings.

According to Macquarie analysts, the update could see Telstra provide more details on how 5G and its investments in networks and applications (NAS) services could add to the telco’s earnings profile.

“We would expect there will be further cost initiatives. Telstra could also revisit some of its loss-making businesses in the New Business segment, which could provide a near-term benefit to EBITDA.

“It is less clear as to what initiatives could be announced to improve market share and average revenue per user in its core operations,” the analysts added.