At one stage in morning trade the Telstra Corporation Ltd (ASX: TLS) share price had sunk as much as 4% to $3.08 following the release of its half year results.
Incredibly, the telco giant's shares have now rebounded in full and are flat at $3.21.
Why did the Telstra share price sink lower?
Investors were quick to hit the sell button this morning after Telstra slashed its interim dividend from 11 cents per share to 8 cents per share. This dividend comprises a 5 cents per share ordinary dividend and a 3 cents per share special dividend.
Which is consistent with Telstra's dividend policy of paying out 70% to 90% of underlying earnings.
Why did Telstra cut its dividend?
The company was forced to cut its dividend after its profits declined significantly during the first half.
During the half, reported earnings before interest, tax, depreciation and amortisation (EBITDA) fell 16.4% to $4.3 billion and net profit after tax fell a sizeable 27.4% to $1.2 billion.
The NBN was largely behind the company's significant drop in earnings, with wholesale prices continuing to hit its margins. One positive, though, is that approximately 55% of Australian premises are now connected to the network. This means that more than half of the impact of the NBN is now absorbed.
What about the rest of the business?
Excluding the NBN from the equation, Telstra turned in a reasonably solid report card.
During the period the company added 239,000 retail postpaid mobile services (including 115,000 services on Belong), whilst Telstra Wholesale added 125,000 mobile services that were a mix of prepaid and postpaid. This helped drive Mobile postpaid revenue growth of 2.1%.
In addition to this, the company has made a lot of progress with its costs. Underlying fixed costs were down $162 million in the first half, which brings the total cost reductions achieved since FY 2016 to around $900 million.
What's next?
Looking ahead, management confirmed that it is on track to meet its FY 2019 guidance.
In FY 2019 Telstra expects total income of $26.2 billion to $28.1 billion and EBITDA (excluding restructuring costs) of $8.7 billion to 9.4 billion. $1.5 billion to $1.7 billion of EBITDA is expected to come from net one-off NBN Definitive Agreement receipts less NBN net cost to connect.
Capital expenditure is expected to be between $3.9 billion and $4.4 billion, and free cashflow is expected to be between $3.1 billion and 3.6 billion.
Should you invest?
I suspect that many in the market had expected a more severe dividend cut today, hence why its shares have now rebounded.
While I do see a lot of value in Telstra's shares, I'm not a buyer of them just yet. I'd like to see trading conditions or NBN margins improve before picking up its shares or those of rivals TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC).
