Many investors will be familiar with Telstra Corporation Ltd (ASX: TLS), since the company's dividend has been a staple of investment portfolios for the past 20 years.
However, Telstra shares have plunged recently over a flurry of headlines reporting that its dividend could be reduced, or even slashed to the bone. On the other hand, if the dividend was maintained, this would equate to roughly a 7.5% yield, grossing up to nearly 10% once the benefits of franking credits are included.
At $4.10, are Telstra shares a bargain?
With one of Australia's most powerful brands and a strong core business, there is a good case to be made for owning Telstra today. Even if the dividend were cut in line with earnings, if there were no changes to the company's dividend policy, Telstra should continue to pay north of 5% per annum at today's prices.
On the downside, however, the company has slim growth prospects and faces intensifying competition in its core mobile business. TPG Telecom Ltd (ASX: TPM) is moving aggressively into the space, and Telstra also has the headwind of increasing investment in infrastructure.
Given the number of outages in recent times, Telstra has also committed $3 billion to investing further in its networks, while the end of the NBN-related payments are also expected to leave a hole in the company's earnings when they finish. This means that the company's investment costs are increasing at the same time as income is decreasing and competition is heating up.
So while Telstra is likely to continue paying an attractive dividend, I'm not a buyer of the company today.
