Is Telstra Corporation Ltd (ASX: TLS) one of the best dividend shares on the ASX?
In the decade between the GFC and 2007 Telstra probably was one of the best dividend shares on the ASX.
It paid a consistent dividend with a grossed-up yield north of 10%. What more could you ask for in an era after the GFC surrounded worries about economic collapse?
Telstra generally paid out all of its profits each year as a dividend (sometimes more!). Profit is different to cashflow, but the point is that Telstra wasn’t re-investing any profit back into the business for more growth.
With no growth prospects Telstra was then pushed downhill by the NBN. Telstra lost control of the wire infrastructure and therefore lost control of the cashflow and economic moat.
Telstra’s dividend was cut from $0.31 per share to $0.22 per share in FY18. The following year it was cut from $0.22 per share to $0.16 per share. Ouch! A halving of income is painful for anyone.
Most analysts don’t believe that the dividend will be cut again. But, with the dividend at a low point compared to the past two decades it’s understandable why investors would question whether you can count on the dividend even at this level.
There is now a lot of low-cost competition from the likes of TPG Telecom Ltd (ASX: TPM), Amaysim Australia Ltd (ASX: AYS), Aldi Mobile, Kogan.Com Ltd (ASX: KGN) mobile and so on. When the offerings seem fairly similar it can spiral into a competition on cost, which is only good for the customer.
For the Telstra dividend to grow its dividend from here there needs to be a positive earnings trajectory. Will 5G be enough to kick-start Telstra into earnings growth again? It’s hard to say, 4G hasn’t helped Telstra create a sustainable path for the dividend.
Telstra is currently trading at 18x FY20’s estimated earnings with a grossed-up dividend yield of 6%. Unless the telco can find growth, I personally wouldn’t want to buy Telstra share unless it offered a 10% grossed-up dividend yield.
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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. The Motley Fool Australia has recommended Kogan.com ltd. 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.