Why Telstra Corporation Ltd could be about to slash its dividends

Touted dividend reductions may enable Telstra Corporation Ltd (ASX: TLS) to invest in its future and bite its competitors. 

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »