Telstra (ASX:TLS) share price in focus after AGM dividend update

The Telstra Corporation Ltd (ASX:TLS) share price will be one to watch this morning after providing an update on its dividend plans at its AGM…

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The Telstra Corporation Ltd (ASX: TLS) share price will be on watch on Tuesday after the release of its annual general meeting presentation.

What did Telstra announce at its annual general meeting?

At the annual general meeting the telco giant provided investors with a breakdown on its performance in FY 2020 and the impacts of the pandemic on its operations.

But arguably the most important subject the company covered was its dividend for FY 2021.

The Telstra share price has come under significant pressure since the release of its full year results in August due to concerns that its earnings guidance for the year ahead implied a sizeable dividend cut.

However, as I have mentioned numerous times since then, Telstra's accounting earnings are now notably lower than its free cash flows.

In light of this, I suggested that a switch to a free cash flow-based dividend policy would be more appropriate and could be a way for the company to maintain its 16 cents per share dividend.

At its annual general meeting, Telstra spoke about its dividend and the potential for such a shift in policy.

What did Telstra say?

Telstra's Chairman, John Mullen, commented: "The board is acutely aware of the importance of the dividend to shareholders, and we understand the nervousness from some that COVID and other pressures may force Telstra to again cut its dividend."

"Andy [Penn] has previously said that to maintain the dividend at 16c within our Capital Management framework post the nbn, we need to achieve Underlying EBITDA in the order of $7.5-$8.5b, and I want to assure you that we are absolutely aspiring to achieve this."

"The board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70- 90% of underlying earnings to maintain a 16c dividend," he added.

This would depend on several factors, which include:

"1. whether an underlying EBITDA of $7.5b to $8.5b post the rollout of the nbn is achievable. 2. whether the free cash flow dividend payout ratio remains supportive and we retain a strong financial position. 3. whether there are other factors that would make the payment of the dividend at that level imprudent," Mr Mullen explained.

However, the chairman has warned investors that these comments are not "a guarantee of any level of dividend into the future."  

Rather, it is to demonstrate "the board's commitment to doing all that it can responsibly do to maintain the current dividend and eventually increase it again over time."

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.

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