Telstra dividend tipped to slump to 14c a share

Telstra stock is trading at a seven-year low. Pic: Getty Images

Telstra has little choice but take an axe to its dividends, say UBS analysts, who warn that the payout could fall to as low as 14 cents a share within the next three years.

With the telco’s earnings squeeze getting worse on the back of tighter mobile competition and the ongoing impact of the National Broadband Network (NBN), Telstra doesn’t have a lot of options at its disposal, according to UBS analysts Eric Choi and Tom Beadle.

Telstra has already had to change its long-term dividend policy, cutting the payout for shareholders from 31 cents a share to a promised 22 cents a share for full-year 2018-19.

However with a sharper than expected deterioration in business conditions, Telstra may not be to maintain that level moving forward, analysts say.

According to UBS, the dividend could fall to 18 cents by full-year 2020 and even lower, to 14 cents, by 2021-22.

It’s another potential blow to Telstra shareholders, who have seen Telstra stock (TLS) fall to a seven-year low, amid growing pressure on chief executive Andy Penn, whose future is increasingly in doubt.

Telstra shares lost more ground on Tuesday, ending the session 2.1 per cent weaker at $2.74.

Just how sharp the dividend decline is will depend on whether Telstra wants to hold on to its “A” rating and what additional measures it could take to handle the worsening headwinds.

“We no longer think TLS can support its ‘A’ credit rating, with a potential downgrade to ‘A-’ (and even ‘BBB+’ long term) increasingly likely,” UBS analysts said.

Telstra has an “A/A2” credit rating and the telco’s management is committed to maintaining the “A” rating because its lowers its cost of borrowing. The telco currently refinances about $1 billion in debt each year.

However, the UBS analysts said Telstra can afford to take a hit to its credit rating. given its need for better financial flexibility.

“Telco peers such as Verizon are rated in the BBB range, and enjoy reasonable access to debt markets.

“Additionally, even if Telstra’s cost of debt rose by ~40-50bps (basis points) the net interest cost (~$80m), and EPS impacts are negligible,” they said.

With Telstra set to update the market in June, Mr Choi said the telco may have some measures up its sleeve to contain the pressure on dividends.

“We think Telstra will outline other strategies in June which could protect a 22 cents FY19 DPS, and soften the FY20 DPS cut.”

However, any new initiatives from the June strategy day are not being factored into UBS’s long-term earning per share forecasts.

According to UBS, Telstra is likely to intensify the pace of its $1.5bn productivity program in a bid to cover the ground lost to the NBN.

“For the time being however we reduce long-term EPS to ~15cps — which assumes an upgrade to the $1.5bn productivity program, but a downgrade to the NBN gap to $3.5bn.”