It has been a long drop into the abyss for Telstra Corporation Ltd (ASX: TLS) with the share price tanking around 14% since it announced its dividend cut and disappointing full year results.
It's understandable why shareholders rushed for the exits as Telstra has lost its crown as a reliable dividend paying company. But even ugly ducklings can find redemption and some may be asking if time may be ripe for Telstra to stage a comeback.
The plunge in the price of the stock has driven its yield to attractive levels while the stock is also trading at undemanding valuations.
At least that's what Credit Suisse thinks as the broker upgraded the stock to "outperform" and slapped a $4 price target on Telstra as it believes value has finally returned to the stock after many years.
Those worried about more dividend cuts (and therefore further price weakness) should be comforted by Telstra's decision to put aside $3 billion for a special dividend pool. Credit Suisse thinks this will ensure Telstra can pay a 22 cent a share distribution every year till FY21, if not beyond.
This works out to a grossed up yield of around 8.5% based on yesterday's closing price of $3.72 if franking credits are included. That is not a bad yield given that the Reserve Bank of Australia is not likely to lift official interest rates till sometime in 2018.
There is no guarantee that dividends won't fall after FY21 but this still gives management a long runway to develop and execute its next growth plan.
Trying to forecast earnings growth for Telstra though is perhaps a more challenging proposition. The threat of irrational competition from an aggressive new mobile entrant, TPG Telecom Ltd (ASX: TPM), declining payments from the NBN, and the lack of any obvious growth catalyst for Telstra will overshadow the company for the medium term at least.
Is the downside risk to earnings in the price? Telstra is trading on a consensus price-earnings multiple of 11.5 times for FY18. I think there is still room for the stock to de-rate, although its fat dividend may provide a safety net.
The thing with quality income stocks is they aren't supposed to keep you up at night. So ultimately, the decision whether to buy Telstra really depends on whether you can stomach the earnings uncertainty.
The answer isn't so straight forward is it.
The good news is there are other high-yielding stocks that are on a firmer footing if Telstra isn't to your taste. Click on the link below to see how you can get a free report from the experts at the Motley Fool on five dividend stars you should be putting on your radar.
