The Telstra Corporation Ltd (ASX: TLS) share price has continued its poor run and is tumbling lower again on Tuesday.
At the time of writing the telco giant’s shares are down over 1.5% to a 52-week low of $2.84.
Why is the Telstra share price trading at a 52-week low?
The Telstra share price has come under considerable pressure since the release of its full year results last month.
Although the company delivered a result in line with its guidance and maintained its full year dividend at 16 cents per share, its guidance for FY 2021 spooked investors.
Telstra’s guidance shows that its earnings will be impacted more than expected by the COVID-19 pandemic this year. It expects its underlying EBITDA to be in the range of $6.5 billion to $7 billion.
This suggests that its current dividend could be at risk based on its current policy.
Management explained: “We remain clear that, adjusted for recent accounting changes, our EBITDA, post the nbn, needs to be in the order of $7.5 – 8.5 billion to pay a dividend around 16 cents under the 70 to 90 percent payout ratio in our capital management framework.”
As a result of this, the market appears to be predicting a dividend cut down to ~12 cents per share in FY 2021. This has led to its shares dropping down accordingly since its results release.
Is the Telstra dividend going to be cut?
I’m optimistic that a dividend cut can be avoided if the company elects to change its dividend policy.
Right now, its policy is based on its accounting earnings, which are actually lower than its free cash flows. So, if the company were to shift to a free cash flow-based policy, it should be sustainable at the current level.
Analysts at Goldman Sachs also appear optimistic that this could be the case.
It explained: “Although 16cps is now unsustainable across FY21-22 on the existing payout policy, we note TLS further shifted its dividend focus to FCF ( i.e. TLS justified the 99%, out-of-policy EPS payout as this was well supported by cashflow). Hence we have not revised our 16c dps, believing Telstra will maintain this through FCF, if it believes that is on track for $7.5bn by FY23E.”
Should you invest?
The pullback in the Telstra share price has been very disappointing for shareholders, but I believe it has created a compelling buying opportunity for non-shareholders.
With the market appearing to have now priced in a dividend cut, I believe the downside is limited from here.
There’s also the added bonus of a probable re-rating higher if Telstra decides to shift its policy and is able to maintain its dividend.
As a result, I think the Telstra share price is a strong buy at the current level.
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Motley Fool contributor James Mickleboro 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.