Telstra Corporation Ltd (ASX: TLS) shareholders might be forgiven for being a little nervous about their dividends. After all, Telstra used to be regarded as one of, if not the best, ASX dividend shares on the market. That's the reputation a couple of decades offering a fully franked, ~7% dividend yield can build.
However, that all came crashing down in 2017. That's when the ASX telco slashed its annual dividend from 31 cents per share to 22 cents per share. It hit investors again in 2019, reducing the 22 cents per year to 16 cents. That remains the annual payout Telstra shareholders have been receiving to date.
Last October, Telstra promised to keep this dividend steady at 16 cents in 2021 and perhaps beyond. Here's some of what Telstra CEO John Mullen said at the time:
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… 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.
Well, so far so good. In March, Telstra paid out another dividend of 8 cents per share, keeping to this commitment.
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Does AT&T spell trouble for Telstra shares?
But a piece of news out of the United States might be getting investors worried about Telstra's dividend of late. AT&T Inc (NYSE: T) is one of the largest telcos in the US. It bears many semblances to Telstra, given its old role as a monopolistic telephony service provider.
Recently, AT&T announced a big restructuring, which will include a large dividend cut. It will end AT&T's dividend aristocrat status on US markets. Until now, the company had raised its dividend every single year for 36 years.
Could this be a canary in the coalmine for Telstra?
Well, the company doesn't think so. In February, Telstra delivered its results for the first half of FY2021. It discussed its dividend further at that time. Here's some of what the company said:
Our aspiration [is] for mid to high single digit growth in Underlying EBITDA for FY22 and for Underlying EBITDA to be in the range of $7.5–8.5b in FY23. This range is important to support a 16c dividend inside our dividend payout ratio and to deliver a ROIC of around 8%. We know how important this dividend is to our shareholders and that is why and the board expects to pay a total dividend for FY21 of 16c per share including an interim dividend of 8c per share.
So, in other words, Telstra remains committed to its current dividend, which it thinks it can afford if sufficient earnings growth is achieved (which the company evidently thinks it can hit). If this proves to be the case, it's good news for Telstra's dividend-conscious investors.
On the current share price of $3.45, Telstra's dividend is worth a yield of 4.64%. Or 6.63% grossed-up with Telstra's full franking.
