Is Telstra’s dividend at risk?

We examine why UBS analysts believe Telstra may soon cut its dividend.

As the coronavirus (Covid-19) pandemic escalates across the globe, company dividends look to be coming under increasing pressure, as firms race to preserve capital and shore up their balance sheets.

In light of this, many analysts have turned their attention to how some of Australia’s blue-chips will respond to the current situation.

To answer the headline question then: UBS analysts are now of the opinion that Telstra (TLS) may soon be forced to reduce its dividend payments as the company grapples with uncertain macroeconomic conditions.

Specifically, the Swiss investment bank argues that Telstra will likely trim its dividend from 16 cents per share – down to 14 cents per share – in a move that could come as early as the second half of FY20.

Telstra most recently paid an 8 cent dividend.

Finally, though UBS still believes in the long-term outlook for Telstra, retaining its Buy rating – the current coronavirus pandemic 'has escalated execution risks.'

Telstra share price: to cut or not to cut

Centrally, although UBS believes that the market is accurately pricing in the short-term risks to Telstra's business; ‘what seems less well understood,' contends UBS analysts, 'is the impact that COVID-19 and a weaker macro outlook has on medium-term mobile APRU growth aspirations’ as well as the telco’s ability to monetise its 5G offerings.

With such growth drivers curtailed, the investment bank thinks that Telstra may struggle to grow its earnings (EBITDA and EPS) in the mid-term.

Finally, though UBS believes that TLS has sufficient free cash flow (FCF) to support a 16 cent per share dividend, 'we think TLS is unlikely to declare a 16cps FY20 dividend, if this level cannot be supported in coming years,’ analysts concluded.

Possibly lower dividends, but UBS retains Buy rating

Even when considering all of this, with a strong market position, and the hope of a more rational mobile market and NBN outcomes, UBS continues to favour the blue-chip telco: today reiterating its 12-month price target of $3.70 per share on the blue-chip telco.

At Telstra’s last traded price of $3.18 per share, such a price target would imply potential upside of ~16%.

How to trade Telstra: long or short

Where do you stand: are you bullish or bearish on Telstra? Either way, you can trade Telstra and other ASX telecommunication stocks – long or short – through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) Telstra using CFDs, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter ‘TLS’ or ‘Telstra’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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