Is the Telstra share price a buy for dividends?

Is the Telstra Corporation Ltd (ASX:TLS) share price a buy for dividends?

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Telstra share price

Source: Telstra presentation

Is the Telstra Corporation Ltd (ASX: TLS) share price a buy for dividends?

For most of the past decade Telstra has been considered one of the best blue chip dividend shares on the ASX.

Telstra acted essentially as a utility share. It received reliable cashflow from its customers paying their monthly home phone, internet bill and mobile phone bills at a high margin for Telstra. Even if customers themselves weren’t clients of Telstra, they were likely paying Telstra indirectly because Telstra owned a lot of the cable infrastructure, so telcos would be paying Telstra for access.

This reliable source of earnings helped Telstra pay annual dividends of at least $0.28 per share through the GFC and allowed Telstra to sometimes pay out more than 100% of its earnings. 

But the NBN has ruined that position. Telstra is now competing with plenty of low-cost competition from small players up to big telcos like TPG Telecom Ltd (ASX: TPM).

A dividend is only as strong as the earnings, and Telstra’s earnings have been falling. Whilst revenue has only been dropping by single digits, net profit has been plunging because of lower profit margins. Even in Telstra’s mobile phone division margins have been falling because of big data bundle ofers from low-price providers such as Aldi and Amaysim Australia Ltd (ASX: AYS).

Telstra’s half-yearly dividend was cut to $0.11 per share and then was cut again to $0.08 per share. My concern for dividend investors is that another cut may be on the cards if earnings suffer another big hit in FY20. Management have warned that Telstra is only halfway through the NBN pain.

The telco giant will be the first in the Australian market with a 5G service and 5G phones. If telcos can capture more of the valuation creation with 5G then Telstra’s earnings could rebound, particularly if Telstra can steal some of the NBN’s revenue in the form of wireless broadband. New services like automated cars could also be a source of earnings.

Foolish takeaway

Telstra is trading at 16x FY20’s estimated earnings with a grossed-up dividend yield of 6.6%. For me, job cuts and asset sales are not enough to excite me about the current Telstra share price, and I wouldn’t buy it for dividends because of the chance of more cuts.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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