Is Telstra Corporation Ltd going to cut its dividend?

Credit: Jason Howie

One of the favourite businesses of fully franked income investors in Telstra Corporation Ltd (ASX: TLS) provided an investor update today and flagged that it plans to cut fixed costs by over $1 billion by financial year (FY) 2021.

The group also reaffirmed its full year FY17 guidance for mid-to-high-single digit growth in income and low-to-mid-single digit EBITDA growth – excluding restructuring costs of $300 million to $500 million over FY17.

The group also wants to invest $3 billion in capital expenditure projects in the years ahead, including $1.5 billion to spend on building network infrastructure projects, $1 billion on “accelerating the digitisation of the business”, and $500 million in customer service improvement projects.

Big Capital Allocation Decisions Ahead

The telco is aiming to derive a $500 million EBITDA benefit by FY21 in exchange for the flagged $3 billion in capital expenditure projects and also said the next 6-12 months will see a review of its “capital allocation strategy taking into consideration the long term business and financial profile of Telstra”.

It’s important to note that Telstra itself has flagged a giant $2 billlion to $3 billion negative hit to EBITDA in the years ahead due to the rollout of the NBN network. Further details on its financial headwinds are covered in this excellent article by expert investor Mike King.

Given the size of the negative earnings hit reaffirmed at the AGM today it’s no wonder the group is focused on capital management including capex, opex, share buy-backs, dividends, debt, the balance sheet and the telco’s credit rating.

Notably the chief executive stated at the AGM that: “Importantly we remain committed to maintaining balance sheet settings consistent with the single A credit rating band“.

The group will provide a further update on its capital management plans in February 2017 and given its intended lift in capital expenditure and management’s flagging that its substantial debt load and credit rating are a priority I won’t be surprised to see a cut to its prized dividend in the future.

The stock is up 2.3% to $4.83 today, but still down 17% over just the last six months and I expect it will trade sideways at best over the years ahead.

My two favourite options in the telco space for income and growth are TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC). Both of which I expect could take market share from Telstra in the years ahead by virtue of their better management teams, nimbleness, and superior customer service.

Fully franked income alternatives?

As a conservative income investor I would prefer the home-loan lending kings of Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC) in today’s environment.

These banks lend long term and borrow short term to turn a profit on the interest margin between their loans and liabilities and a rising yield curve (or anything other than virtual zero interest rate policy (ZIRP) globally) is likely to lift their core profitability.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

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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