Can the Telstra dividend keep up with its share price?

The Telstra Corporation Ltd (ASX: TLS) share price hit a new 52-week high of $3.72 this morning. Can the telco giant's dividends keep up with its rising share price?

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Telstra Corporation Ltd (ASX: TLS) shareholders are again celebrating this week, as the Telstra share price hit a new 52-week high of $3.72 this morning – its highest level since December 2017.

Shares of the Telco have come a long way over the past six months, after hitting a low of $2.74 in December of last year. Today's gains put Telstra's rise at over 35% since that time (not including dividends), which is a pretty healthy bump and makes Telstra one of the better ASX blue chips to have owned in 2019 so far.

So what about the dividends?

Not too long ago yielding 32 cents per share, Telstra's dividend has been hammered over the last two years. The dividend was cut back to 22 cents per share last year and 16 cents per share so far this year.

This has occurred for two reasons. Firstly, earnings have fallen as a result of the NBN rollout punching a massive hole in Telstra's balance sheet. Secondly, the company is keeping a bigger chunk of these (smaller) profits for reinvestment.

I believe this is a good sign, as the market was very attached (maybe a bit over-attached) to Telstra's massive dividend and it would have been a poor decision to keep it in the face of the structural changes Telstra has had to make. This drove the punishment that the Telstra share price received, but the recent gains indicates that the market has finally 'got over it'.

What does the future hold for Telstra's dividend?

I expect that the dividend has found a floor at 16 cents and is not likely to be cut further. Telstra's payout ratio is sitting around 50%, which looks to me like a happy middle ground between rewarding shareholders and investing in itself. Telstra's Chief Executive Officer, Andy Penn, is looking towards a 5G future, recognising that gaining an early foothold is the best thing the company can do to grow its earnings in a post-NBN world.

Foolish Takeaway

When Telstra was sitting at the $2.74 mark, 16 cents per share meant a grossed-up dividend yield of 8.34%. With the recent price gains, a buy-in yield today would net you a 6.14% yield, which still makes it a pretty good buy for income in my opinion, while still leaving in a bit of room for further price growth. However, I wouldn't expect any big increases going forward until the 5G roll-out begins to reap rewards. Patience grasshopper, patience.

Motley Fool contributor Sebastian Bowen 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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