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Telstra Corporation Ltd (ASX:TLS) shares continue to tumble on dividend concerns

The Telstra Corporation Ltd (ASX: TLS) share price is having yet another day in the red on Wednesday.

In afternoon trade the embattled telco giant’s shares are down 1.1% to $2.78.

Why are its shares dropping lower again today?

While some of today’s decline could be attributable to the market dropping lower after heavy declines on Wall Street overnight, a bearish broker note could also be doing some damage.

According to a note out of Citi, its analysts have retained their sell rating and the $2.70 price target on Telstra’s shares.

The broker has been busy looking into the sustainability of its dividend and came to the conclusion that only half of the current dividend is supported by genuine operational cash flows.

Because of this, Citi believes it is inevitable that a dividend cut is coming and speculates that one could be made for FY 2019 as soon as next month when Telstra holds its strategy day.

The broker has pencilled in a dividend of 20 cents per share in the next financial year, down from 22 cents in FY 2018.

Should you buy on this weakness?

While I am cautiously optimistic that things will not be as bad as many are making out, I don’t believe that Telstra’s shares can be classed as a low risk investment option any more.

With NBN margins weak and competition heating up in the mobile space, the company really does need to find sources of growth quickly. And while 5G internet could be its saving grace, there’s no guarantee that it will be and it is still about a year away.

While I would still choose a small investment in Telstra ahead of industry peers TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC), it isn’t exactly an industry I would be rushing into. In my opinion there are better areas of the market to be focusing on right now.

This dividend share, on the other hand, is operating in a growing industry and has just increased its dividend by 27%.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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