Telstra Corporation Ltd (ASX: TLS) has been Australia's largest telecommunications business for a very long time. It still is the biggest, even after its steep decline.
Management recently revealed Telstra's FY17 annual results and there was one thing that caught the whole market's attention: the dividend is going to be reduced.
I have made the point several times in the past that it's very unhealthy for a business to pay out more than 100% of its profit and that's what Telstra has been doing.
However, now that it's going to reduce the dividend, isn't that a good thing? Perhaps it warrants Telstra to go back on the buy list, or at least on the watch list.
Why Telstra could be a buy
The reduction in the share price has increased the attractiveness of the shares. Every business is worth a certain amount and this low price of $3.86 could be a good buy over the long-term if management can grow earnings over the next decade.
The share price decline also has the pleasing effect of boosting the dividend yield. This means that Telstra shares are trading on a forward grossed-up yield of 8.14% even on the future annual 22c dividend payout per share.
Future technological changes could boost Telstra's earnings. Automated cars, 5G and more could help, but this is all speculation at the moment and Telstra would have to make sure it's ahead of the pack.
Why Telstra may not be a buy
Price seems to be a huge factor for telecommunications customers and makes it a very competitive market. Telstra has never been known for being the cheapest. TPG Telecom Ltd (ASX: TPM) is planning to launch a mobile network in Australia and there are dozens of competitors on the NBN. It's hard to see how Telstra can grow earnings over the next few years.
Telstra is still paying out a large percentage of its profit as a dividend, even with a reduction. There are no grand growth plans to grow earnings meaningfully. Market-beating shares are always ones that have at least some type of growth plans.
So, is it a buy?
The current price does offer an intriguing amount of dividend income. However, the underlying profit is still expected to decline over the next five years and the dividend could follow it down.
Telstra isn't a bad company and could be a good investment over the next decade at the current price, but I think there are better shares for income and growth out there.
