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TELSTRA DIVIDENDS: HOW DO THEY STACK UP GOING FORWARD?

TELSTRA DIVIDENDS: HOW DO THEY STACK UP GOING FORWARD?
Written by: Robert and Russell Markham

Did you attend the virtual shareholder’s meeting held by Telstra? At the meeting, chairman John Mullen told shareholders that the 16 cents per share dividend payout was basically assured. The chairman of Telstra, Mr. John Mullen noted:

“The board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70-90 per cent of underlying earnings to maintain a 16¢ dividend.” https://www.smh.com.au/business/companies/telstra-chairman-vows-to-protect-dividend-calls-for-simpler-pay-model-20201013-p564ji.html

Further insight from the Australian Financial Review noted:
“Strictly speaking Telstra’s dividend payout ratio is 70 per cent to 90 per cent of underlying earnings. But in declaring its dividend for 2020, the Telstra board, approved a 99 per cent payout ratio on underlying earnings.” https://www.afr.com/chanticleer/telstra-is-still-a-yield-play-20200813-p55l9v

An opinion piece in the Sydney Morning Herald was of the view that this was a sweetener to quell the frustration of shareholders. Most certainly the share price has been on the slide…down over 20% for 2020 so far. Imagine if the dividends were not going to be paid!

Why would one want to hang onto a share that is falling heavily? I often hear the argument to hold TLS.AX for the long run and get the dividends. Let’s investigate this a bit further. If I go back to 2 January 2015, TLS.AX traded at $5.97 per share. The Price as of 20 October 2020 is $2.80 per share – down 53%! But I hear the arguments…”I am after the dividends and I will therefore hold on as I am not concerned on the share price…it is the dividends I am after!” Let us take a closer look at the dividends paid out since 2015 for TLS.AX:

Dividends:
2020$0.16
2019$0.16
2018$0.22
2017$0.31
2016$0.31
2015$0.305
Total$1.465

Franking Credits:
2020$0.069
2019$0.069
2018$0.094
2017$0.133
2016$0.133
2015$0.131
Total$0.629

You can see all the dividends per this link: https://www.telstra.com.au/aboutus/investors/shareholder-information/dividends#:~:text=The%20Telstra%20dividend%20policy%20is,via%20fully%20franked%20special%20dividends.

Let’s assume you bought TLS.AX on 2 January 2015 for $5.97 per share. Current price as of 20 October is $2.80. Add back the dividends over the last 5 years: $2.80 + $1.46 = $4.26. Then add in the franking credits of $0.629. Total intake now is $4.889 compared to the purchase price of $5.97 per share. Accounting for your dividends and franking credits, you are still down 18% since 2 January 2015! The VVC/AU (the average of all the stocks we track for Australia) is up over 47% since that time (and this does not account for any dividends and franking credits).

The example of TLS.AX demonstrates why we should not hold on to stocks at all costs for dividends. You would have been better off in a term deposit paying 2% a year. At least you would have maintained your capital despite earning a paltry 2% yield.

In VecotrVest 7 for Australia, If you view TLS.AX in Stock Viewer, check the Dividend Yield (DY) column, and then check the Earnings Yield Column (EY). EY is effectively what TLS.AX can pay and DY is the yield on track to be paid. As you can see over the years (if you sent the date back a bit in time), the DY value for TLS.AX has effectively been the same value as EY on many occasions. You can see this for yourself in Stock Viewer if you go back in time and compare the DY column to the EY column (I will show you how to do this in the video at the end of this Essay). What this means is that TSL.AX is effectively paying out what it earns via dividends. In the technology space is that the way to go? One could argue that, in this very competitive space, more should be spent on research, development and investment. Is this one of the reasons the Telstra’s share price has slid over the years?

A simplistic view above, but it may have a fair bit of merit, but there are plenty of other factors in play including the rollout of the NBN which has taken away some of Telstra’s ability to earn higher profits. Factor in the likes of competitors including TPG and the upcoming 5G rollout…and all of this has provided headwinds to Telstra’s once dominant market position.

CLICK HERE to see the video and get some further insight into Telstra’s share price, the dividends being paid out and the likelihood for further dividends in the future.

DISCLAIMER: THE ABOVE ARTICLE DOES NOT CONSTITUTE FINANCIAL ADVICE.  PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU SHOULD CONSULT WITH YOUR LEGAL, TAX, FINANCIAL, AND OTHER ADVISERS PRIOR TO MAKING ANY INVESTMENT

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