Why Macquarie Group Ltd just slapped a $4.50 share price target on Telstra Corporation Ltd

Credit: Telstra

Financial news wires are reporting that the analysts at investment bank Macquarie Group Ltd (ASX: MQG) have run the ruler over Telstra Corporation Ltd (ASX: TLS) after the ACCC released its draft decision ruling against mobile roaming in regional areas.

This decision looks a big positive for Telstra investors as it means it will not have to share its market-leading regional network with rivals such as Optus, Vodafone or even TPG Telecom Ltd (ASX: TPM) in the future.

Macquarie though reportedly believes that the profit growth outlook for Telstra is tough with rising competition in the mobile space in particular.

Recently, news that cut-price specialist TPG Telecom bid around $1.3 billion to secure its own mobile network has spooked investors across the entire telco space due to the belief that TPG could spark a price war by offering mobile subscribers super-cheap deals in order to win market share.

This does look a potential problem for Telstra alongside the earnings hole it has to fill as a consequence of the arrival of the NBN. In fact Telstra’s coming problems are covered in more detail in this excellent article by share market guru Mike King.

For FY 2018 Macquarie reportedly expects Telstra to pay a dividend of 31 cents per share on earnings of 28.5 cents per share, which means the company will be paying out more in dividends than it is actually making in free cash profits.

This is why income investors should be careful that they don’t lose more of their capital than they make back in dividend payments when buying Telstra shares.

It’s also possible that Telstra may be forced into cutting its dividend payments in the years ahead to protect its balance sheet. For these reasons I’m not a buyer of Telstra shares, especially when there are other lesser known, but superior looking options for dividend investors available to buy today.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra Limited. Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited and TPG Telecom Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of TPG Telecom Limited. 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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