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Are Telstra Corporation Ltd shares a buy for its fully franked 6.2% dividend?

Credit: Telstra

Telstra Corporation Ltd (ASX: TLS) has many of the hallmarks of an ideal first investment. Unfortunately, many buyers who use the company in their daily lives may simply expect that Telstra shares are as ever-present and reliable as Telstra’s businesses have been. That isn’t necessarily the case.

As a result of many factors including recent network outages, Telstra is investing billions in increasing the quality of its network, as well as its customer service. This is expected to save it money each year over the long term, but Telstra has also forecast a ~$2 billion cut to its earnings once payments for the establishment of the National Broadband Network (NBN) cease.

With Telstra currently paying out around 75% of its Net Profit After Tax as dividends, the company would appear to have ample room to maintain current payments. However, when you factor in a $2 billion hit to earnings and higher capital expenditure, Telstra’s dividend could well be under threat.

The only alternative for the company would be to increase debt, and management has already announced that debt is likely to climb over the next few years.

Since higher global interest rates also now appear to be on the table, Telstra’s debt pile is only going to become less attractive. Competition is also firming up from the likes of Optus, Vocus Communications Limited (ASX: VOC), and TPG Telecom Ltd (ASX: TPM), although we have seen that Vocus and TPG already have plenty on their plates.

Even so, for the above reasons, I’m not a buyer of Telstra today.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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