Telstra’s Precarious Dividend

Australia | Aug 21 2020

Following a disappointing FY20, most brokers believe Telstra will be forced to cut its dividend in FY21.

-NBN, virus hit Telstra’s FY20 profits
-Most analysts see dividend cut in 2021
-5G rollout will help boost mobile earnings
-Brokers mixed on Telstra’s value

By Nicki Bourlioufas

The introduction of the national broadband network (NBN), a hit from covid and margin contraction in the mobile business are adding to Telstra's woes and analysts expect a cut to its full-year dividend for fiscal 2021 as the telco experiences an earnings trough.

After its recent disappointing profit result for FY20, analysts are downbeat on the outlook for FY21. Telstra ((TLS)) posted a -14.4% fall in net profit after tax for FY20 to $1.84bn, down from $2.15bn the previous year. Total income decreased -5.9% to $26.2bn while dividends were declared at 16 cents per share including a special dividend of 3cps.

Telstra said the pandemic has cost the telco $200m in earnings this year, while the NBN’s impact totalled $830m. Overall, mobile revenue fell -$461 million in FY20 while NBN migration and a continued drop in voice services affected fixed-line revenue.

According to Morgans, FY21 earnings will be further negatively impacted by covid and strong competition. The broker expects a -15% drop in consolidated earnings (EBITDA) for FY21, which would result in earnings per share falling -37% and its dividend forecast dropping -25%. “We now forecast a 12cps [fully franked] dividend from FY21 onwards.”

In FY21-22, Morgans predicts dividends will be supported by special dividends. After FY23, NBN one-off hits effectively disappear and this would become a 12cps ordinary dividend. “There is upside risk to our DPS target if the competitive environment proves to be more rational than management’s current thinking.

On the positive side, mobile average revenue per user (ARPU) and EBITDA are expected to improve from the second half of FY21 as Apple’s 5G iPhone is eventually rolled out, which “is likely the main catalyst for TLS customers to upgrade to 5G”. Telstra’s 5G network now covers 53 cities and regional towns around Australia and expanding that coverage will be a key focus in FY21. Morgans has reduced its Telstra price target to $3.21 from $3.73 and moved to a Hold recommendation from a prior Add.

JP Morgan forecasts a full-year dividend of 13cps for FY21, based on a 90% payout of underlying profit, at the top end of the company’s range.  At the current share price, that implies a yield of around 4.2%, “which is not quote ‘overly compelling.’” JP Morgan has downgraded Telstra to a Neutral rating and forecasts the telco’s profit for FY21 will drop -22% to $1.6bn, and by -15% in FY22 to $1.5bn. The broker’s price target is $3.40.

Morgan Stanley is slightly more downbeat and has a price target of $3.00.

Unlike some other brokers, UBS believes Telstra is undervalued and has a price target of $3.70.

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