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Will Telstra cut its dividend policy due to COVID-19?

With the coronavirus pandemic causing havoc across financial markets, many ASX-listed companies are looking to preserve capital and strengthen their balance sheets. As a result, companies are looking to adopt capital protection strategies by deferring or slashing their dividend payouts.

Evidence of this strategy was reflected recently when the Australian Prudential Regulation Authority (APRA) advised banks and insurers to reduce their dividend return to shareholders. In light of this, the attention has turned to how other ASX blue-chip shares will respond to the current market situation.

Telstra Corporation Ltd (ASX: TLS) has been a favourite among income investors for a long time, with a dividend payout policy of around 70% to 90% of underlying earnings. However, uncertain macroeconomic conditions could put the company’s future dividends at risk. So, is Telstra positioning to cut its dividend?

Are Telstra’s future dividends at risk?

Telstra recently paid an interim dividend of 8 cents per share, distributing $951 million to its shareholders. The interim dividend was comprised of a fully franked dividend of 5 cents per share and a special dividend of 3 cents per share, representing an 83% payout ratio if underlying earnings.

Given the uncertain macroeconomic outlook, some analysts and investors have questioned whether Telstra can maintain its dividend payout policy. Despite the uncertainty, Telstra seems to be one of the few companies that are relatively protected from the COVID-19 pandemic.

Telecommunications play a critical role in all social and economic aspects. As a result, the services provided by Telstra are essential and have low exposure to discretionary spending. In addition, Telstra has actually experienced a surge in demand for data and communications with a large portion of the Australian workforce working from home.

Therefore, Telstra looks well-positioned to maintain its future dividends.

How has Telstra responded to the pandemic?

Telstra was one of the first companies to instruct thousands of its office staff to work from home. As other members of the nation’s workforce moves to working from home arrangements, demand for telecommunications has become more urgent. As a result, Telstra was pushed to expand its workforce, advertising approximately 1,030 customer service jobs.

Telstra also announced a range of measures to help customers deal with the havoc caused by the pandemic. Such initiatives included scrapping late fees, giving consumers and small business broadband customers unlimited data until the end of April and also providing pensioners with unlimited home phone calls.  

Should you buy Telstra shares?

As a result of the measures introduced by Telstra and the rush to hire new employees, the company warned shareholders that the company could experience little growth for the full year.

In an update to the market late last month, Telstra informed shareholders to expect free cash flow and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be at the bottom end of its forecasted range. In addition, the company expects underlying EBITDA growth to be in a range of $0 to $500 million for FY20.

Despite the impact on future growth, Telstra looks well insulated to navigate through the pandemic. However, before making an investment decision, investors should note that the pandemic is a fluid situation that is rapidly evolving.

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Motley Fool contributor Nikhil Gangaram 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.