At the current Telstra Corporation Ltd (ASX: TLS) share price, the FY21 dividend yield might be quite sizeable. Could Telstra shares be worth owning?
How big is the Telstra dividend going to be?
Telstra has a few different objectives regarding its capital management framework.
It wants to maximise returns for shareholders. Telstra wants to maintain financial strength. The telco also wants to retain financial flexibility.
With that in mind, there are four principles that are guiding Telstra.
The first is that it's committed to balance sheet settings that are consistent with an A band credit rating.
The next principle is that it's going to pay 70% to 90% of underlying dividends as fully franked ordinary dividends.
Third, it's targeting a capital expenditure to sales ratio of around 12%, excluding spectrum, from FY23.
Finally, Telstra is going to maintain its financial flexibility for portfolio management and strategic investments.
Telstra also intends to pay special dividends. It's returning in the order of 75% of net one-off NBN receipts to shareholders over time through fully franked special dividends.
In the FY21 half-year result, it declared an interim dividend of 8 cents per share. Telstra also said that it intends to pay total dividends of $0.16 per share in FY21.
Profit guidance
Telstra now expects its total income to be in a range of $22.6 billion to $23.2 billion.
FY21 second half underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be in the range of $3.3 billion to $3.6 billion, compared to $3.3 billion in the first half.
The underlying EBITDA guidance for FY21 of between $6.6 billion to $6.9 billion includes an in-year NBN headwind of approximately $700 million. There's also an estimated COVID-19 FY21 impact of approximately $400 million.
The guidance range for free cashflow after operating lease payments was recently increased from the range of $2.8 billion to $3.3 billion, up to a range of $3.3 billion to $3.7 billion due to working capital management and the impact of lower hardware revenue.
Is the Telstra share price worth looking at?
Morgan Stanley rates Telstra shares as a buy, with a price target of $4. The broker expects the FY21 and FY22 dividend is going to be $0.16 per share, which translates to a grossed-up dividend yield of 6.7%. Morgan Stanley noted that there was a little boost to funding of mobile networks in the regions within the federal budget.
However, not every broker thinks that Telstra is a buy. Morgans only rates Telstra as a hold with a price target of $3.33 – which is lower than where it is right now. However, Morgans has noted the restructure will enable the telco to realise the value of its infrastructure assets. According to Morgans, Telstra shares are valued at 28x FY22's estimated earnings.
