This has been a tough year for Telstra Corporation Ltd (ASX: TLS) with its share price crashing by nearly a third as competitive pressures have cast a shadow over its generous dividend payout.
Some believe Australia's largest telco can find its groove again thanks to its juicy dividend yield of around 9% once franking credits are included thanks to payments it receives from the NBN for giving up its copper network and growth opportunities from 5G (next generation mobile internet).
On the other hand, detractors will point out that its extraordinarily high yield is a sure sign Telstra is a yield trap!
This means the market has sold the stock down (and artificially bolstered the yield as yield and price move in opposite directions) in anticipation of a dividend cut.
I believe there is a greater chance the latter group is right. History has shown us that whenever blue-chip stocks trade on high flying yields that are well in excess of bond rates, they tend to come crashing back to earth thanks to a dividend downgrade.
More importantly, earnings pressure on Telstra isn't easing. If anything, the pressure is probably increasing.
Firstly, the telco warned on Monday that it may have to downgrade its earnings projections for next year following the NBN's decision to cease its rollout of its service on hybrid fibre co-axial (HFC) owned by Telstra.
The NBN pays Telstra for this privilege but will stop until it can start putting customers back on HFC, hopefully in six to nine months. Shareholders were counting on these payments to fund Telstra's dividends.
The other piece of bad news is mobile market data showing that Telstra and Optus are losing ground to lower cost mobile resellers.
The Australian Financial Review reported that a market study by research firm Telsyte found that more than 200,000 of 444,000 new services in the first half of 2017 were signed up to Mobile Virtual Network Operators (MVNOs).
MVNOs include the likes of Kogan Mobile and ALDImobile. While ALDImobile uses Telstra's network, the margins Telstra makes on ALDImobile customers are far skinnier than what it makes from signing up customers directly.
Mobile used to be the earnings growth engine for Telstra but that party is over. Even without MVNOs, the market was already anticipating the entry of Australia's fourth mobile operator – TPG Telecom Ltd (ASX: TPM).
It is anticipated that TPG will be very aggressive on pricing and mobile plan features to win market share from incumbents. Being squeezed between MVNOs and TPG will only add to the risk of a dividend cut by Telstra.
The rollout of 5G may give Telstra back its growth mojo as it may allow the telco to differentiate itself from the competition, just like when 4G first arrived.
But 5G isn't expected to be offered in Australian until 2020 – and that leaves Telstra with a long dividend bridge that needs to be reinforced for the next three years.
In the meantime, I would not touch Telstra until it cuts its dividend or find new growth levers it can pull to fill those dividend holes.
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