One thing that divides opinion among investors right now is the sustainability of the Telstra Corporation Ltd (ASX: TLS) dividend.
I believe the 16 cents per share dividend is sustainable from its current cash flows, but some believe another cut is coming with its full year results in August.
And while Telstra could decide to be conservative with its capital because of the pandemic and cut it down to 14 cents per share, I'm optimistic that this won't be necessary.
One broker that believes Telstra's dividend cuts are over is Goldman Sachs. This morning it revealed a few reasons why it is forecasting a 16 cents per share dividend through to FY 2023.
Why is Goldman Sachs positive on Telstra?
Goldman Sachs has downgraded its earnings estimates for the next few years. This is to reflect the timing of the NBN rollout, mobile average revenue per user declines (in respect to lower mobile roaming revenues), and higher bad debt charges and labour costs.
However, it doesn't believe this will be enough to force a dividend cut for three reasons.
Goldman commented: "In an NBN world, with capex/sales of c.12%, we estimate TLS will generate 24¢ps of cash in FY23E, comfortably funding a 16¢ dividend (66% payout vs. 70-90% EPS target)."
The broker also expects its earnings to be strong enough in FY 2022 to support the dividend. "Our FY22E underlying EBITDA of $7.9bn is above TLS targeted $7.5bn to maintain its 16¢ dividend," it added.
And in the near term, it believes "it is unlikely TLS would have accelerated $500mn in capital spend in CY20, should this have impacted its ability to fund the dividend."
Goldman Sachs stress tested its dividend assumptions under three bear case scenarios. These include the permanent loss of roaming revenue, fixed margins of 0% in FY 2022 and FY 2023, and the halving of data and IP earnings from the NBN impact.
In each of the scenarios, the broker found that Telstra would have "an adequate buffer to maintain its 16¢ dividend."
In light of this and with its shares trading at a significant yield spread to the Australian bond rate, the broker has held firm with its conviction buy rating and given its shares a $4.05 price target.
I agree with Goldman Sachs on Telstra and feel it would be a great option for income and value investors right now.
