Why the share price of Telstra Corporation Ltd (ASX:TLS) tumbled into the red today

The share price of Telstra Corporation Ltd (ASX: TLS) failed to hang on to early gains as the telco suffered the biggest pay strike of any S&P/ASX 100 (Index:^ATOI) (ASX: XTO) stock.

An initial tally showed that 62% of shareholders voted against Telstra’s remuneration report at its annual general meeting (AGM) today, according to the Australian Financial Review.

That is worse than the backlash against AMP Limited (ASX: AMP) and Commonwealth Bank of Australia (ASX: CBA), which got 61% and 50% of votes against their executive pay packages.

The share price of Telstra was up 1.3% in early trade but subsequently tumbled to trade 1.5% in the red at $3.06 during lunchtime trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index gained 0.6%.

Telstra’s chairperson John Mullen admitted that executives in large cap companies are paid too much as he asked for time for the largest telco to make changes to remuneration packages. A second strike at next year’s AGM will give shareholders an opportunity to spill the board.

The protest vote comes during a dark period for the company and the telco sector with intense competition and the impact of the national broadband network triggering a slump in profits and forcing Telstra to cut its dividend.

It’s about time that remuneration is finally debated so openly but I don’t think this is the reason why Telstra is being sold off.

There are two other reasons that I think are bigger drags on the stock. The first is the Telstra2022 (or T22) strategy to put the telco back onto the path of growth.

The four-year plan makes a lot of sense but what’s obvious is that there is going to be more pain in the interim before shareholders see any real benefits from the major restructure. Execution risk for such big transformation projects is high!

The second point is that the elephant in the room has not been addressed – that being Telstra’s dividend.

The company had slashed its FY18 dividend to 22 cents a share from the previous year’s 31 cent payout but gave no indication of what FY19 holds.

It wasn’t reassuring to hear Mullen say he wished he could tell shareholders that the pain is just temporary and Telstra will be back to paying increasing dividends again, but he couldn’t. This is the right thing to say although some shareholders may have decided to bail as FY19 dividends are almost certainly going to be lower.

I think Telstra will pay a dividend of at least 15 cents a share this financial year, which will put the stock on a yield of 7% if franking is included.

If management can convince shareholders that its T22 plan can sustain or better the 15-cent dividend beyond FY19, the stock is likely to hold its ground above $3 a share.

This means Telstra won’t be a bad place to park some capital, especially in this climate where the banks are squeezing deposit rates to protect profit margins.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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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