Telstra Corporation Ltd: Will a dividend increase be announced this week?

Telecommunications giant Telstra Corporation Ltd (ASX: TLS) is expected to report its full year results on Thursday 14 August. In May the company advised it would provide an update on capital management at this time. This may include a special dividend, the launch of a share buyback, or an increased half-yearly dividend.

Many yield-hungry investors would prefer a dividend that increases sustainably over time.

So will the dividend increase?

Before answering this question, let’s look back at Telstra’s recent dividend history. At the last full year result the dividend was 14.0 cents and six months ago it increased to 14.5 cents.

Telstra has reaped over $2.50 billion from asset sales in the second half of the financial year, including its 76.4% stake in the Asian mobile service provider CSL and 70% of its holding in Sensis. These proceeds take the amount of excess free cash flow to above $3.0 billion. One might think an increased dividend to at least 30 cents for FY2014 (requiring a final dividend of 15.5 cents) would be a certainty. However, the following catalysts need to be considered……

What may prevent an increased dividend?

Management may be intending to make a large acquisition.

There are uncertain future cash flows as NBN renegotiations are yet to be finalised.

Slower-than-expected growth rates in mobile services or just a negative outlook statement for mobile growth.

What may assist an increased dividend?

Continued cost rationalisation, lower interest costs and increasing NBN disconnection payments.

Preserving cash by avoiding large capital expenditure. The recently announced strategy of co-investing alongside Asian telecommunication companies to build 4G networks may assist.

Increasing fixed-line profitability. This may result from a slowing of the decline in fixed-lines and a reduction in churn rates.

And the answer is…….

In my opinion, a share buyback is the more likely scenario as Telstra may want to retain maximum flexibility. By spending less on a buyback and retaining funds, the company would be able to bolster growth should a suitable opportunity arise to make a large acquisition. A buyback or a special dividend would still be supportive of the share price.

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