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Can ASX telco shares provide stable dividend income going forward?

In 2020, most ASX telcos finally gave up on their dreams of international expansion and world domination. Long gone are the days when Telstra Corporation Ltd (ASX: TLS), and its competitors, could define themselves as fast-growing tech companies.

The telecommunications sector has instead realised that it is a utility-like business, selling highly commoditised products with low margins and profits.

This is not all bad news though. In such an environment, incumbents usually have a competitive advantage as they already have costly infrastructure put in place. Thin margins coupled with heavy capital expenditure will prevent more competitors from joining the fray. This will lead to consolidation within the industry, which is already happening with recent mergers.

Fortunately, consolidation and savvy cost cutting initiatives should allow these ASX telcos to pay stable – albeit not growing – dividends for years to come.

Telstra

As the largest telecommunication company in Australia, Telstra does not require an introduction. At current prices, it provides a nice fully franked dividend grossed up to around 4%.

For the next 2 years, Telstra is forecasted to maintain its dividend steady at about 16 cents per share, which implies a dividend well covered by earnings with a payout ratio of around 75%.

Although the dividend appears stable, with a current price-to-earnings (P/E) ratio of 19, I think Telstra’s shares are fairly overvalued at present.

Spark New Zealand Limited (ASX: SPK)

Spark operates in New Zealand and is listed on the NZ exchange as well as on the ASX. With a market cap of $7.5 billion, it is the second largest telco within Australasia. Spark rebranded in 2014, when it changed name from the previous Telecom New Zealand.

As with the rest of the sector, Spark seems fully valued at present with a P/E of around 19. Further, revenue and earnings are both set to remain stable or drop slightly going forward, which I think is bad news for its dividend.

With a dividend yield of 4.88%, Spark appears to be the largest dividend payer within the industry. However, with a payout ratio close to 94%, I believe the dividend could be under threat and would not be surprised if it were trimmed.

TPG Telecom Limited (ASX: TPM)

Since the merger with Vodafone Hutchison was announced in 2018, the TPG share price has been quite volatile. At present, TPG sports a P/E of 35, which is roughly double the P/E of the broader market.

With an extremely low payout ratio of 21%, the dividend has ample runway to increase in the coming years. However, between the stretched valuation and the very low dividend starting base of 0.6%, TPG might not be the best choice for income-oriented investors.

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Motley Fool contributor Giacomo Graziano 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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