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Why Telstra Corporation Ltd could be about to slash its dividends

Speculation that Telstra Corporation Ltd (ASX: TLS) will cut its dividends from 31 cents per share last financial year to around 25 cents per share this year has seen some dividend focussed investors running for the exit door.

Investors have also been spooked by TPG Telecom Ltd’s (ASX: TPM) announced plan to build Australia’s fourth mobile phone network.

Adding to the perceived woe, Vodafone Hutchison Australia has appealed to the Federal Court against the ACCC’s interim decision not to regulate mobile roaming in regional areas.

Telstra is siding with the ACCC in this case because regulated regional mobile roaming would strip returns from the company’s significant investment in the provision of mobile services to regional areas.

The market will have factored future revenue loss associated with an accelerated NBN rollout into the current share price, which is now hovering unhappily around $4.10.

Investors seeking medium to long-term gains should not close their eyes to ongoing judicial processes, market speculation, and share price fluctuations. Short term volatility can, on occasion, flag desirable entry, exit and accumulation opportunities for medium to long term investors.

Strategic investors tend to be focussed on any opportunities to purchase stock such as Telstra at below fundamental value assuming that the company concerned is resilient enough to grow value in the face of likely competition, broader market risk, and technology related risk and opportunity.

Notwithstanding market competition ebbing away at profit margins, Telstra has demonstrated resilience in being able to increase its share of the mobile telecommunications market.

Telstra’s business remains competitive and it has potential to grow in many directions including its cyber security, global communications and e-health businesses.

As an infrastructure rich wireless provider, Telstra is well positioned to compete directly with NBN.

Put simply, mobile phone towers can be linked with cable to provide high speed, data rich internet access without necessarily going anywhere near the NBN.

While competing against NBN at one level, Telstra is also likely to remain a key NBN reseller due to its capacity to package a wide range of services into its plans for households, businesses and corporations.

Telstra and its competitors are currently in a frantic rush to cut costs by terminating staff and consolidating business processes while pretending to deliver a consistently high level of customer service.

There may be several reasons behind this trend that go beyond simple market competition. Investors should never forget that the telecommunications business within Australia is controlled by Federal Government puppeteers that seek to win votes and generate revenue for government.

Companies may seek to mask any excessive profits within such environments. Ability to play the referee can be as important as being able to play the opposition in any highly regulated game and Telstra retains stealthy political clout.

Foolish takeaway

The fundamentals of Telstra’s business continue to be pretty solid. Many retiree holders will undoubtedly be unhappy with any decision to reduce dividends. However, the harsh reality is that Telstra needs cash to invest in itself to prosper. Borrowing money to pay unsustainable dividends is not a sensible way forward for any business.

The challenge for Telstra’s CEO Andy Penn is to sell his company’s underlying strength and abilities to the market.

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Motley Fool writer Paul Ranby has no financial interest in any company mentioned. The Motley Fool Australia owns shares of Telstra Limited and TPG Telecom Limited. We Fools may not all hold the same opinions, but we all believe that considering a makes us better investors. The Motley Fool has a . This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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