Is the Telstra share price a buy for dividends and growth?

Telstra's updated capital management framework includes principles to maximise fully-franked dividends and invest for growth.

Key points
  • Could Telstra be an opportunity for both dividends and growth?
  • The telco wants to maintain and grow its dividend
  • Its T25 strategy is expected to help profit growth over time

The Telstra Corporation Ltd (ASX: TLS) share price is a consideration for both dividends and growth.

Telstra is Australia's largest telecommunications business. Though, it has been suffering during the transition of households onto the National Broadband Network (NBN).

But now, the company is feeling more confident about the future.

A woman shows her phone screen and points up.

Image source: Getty Images

What are Telstra's dividend credentials?

Since 2019, the telco giant has paid an annual dividend of 16 cents per share to shareholders.

Telstra recently released its T25 strategy for the next few years. Its updated capital management framework includes principles to maximise fully-franked dividends and seek to grow them over time, invest for growth, and return excess cash to shareholders.

This dividend principle reflects shareholder feedback about the importance of its dividend.

As it delivers its T25 commitments, Telstra said it's confident about maintaining a minimum annual dividend of 16 cents per share, fully franked. That's subject to no unexpected 'material events' and the requirements of its capital management framework.

Telstra expects its cash flow to remain ahead of its accounting earnings. The company's focus is on growing its underlying earnings into its total dividend.

At the current Telstra share price, it has an expected grossed-up dividend yield of 5.7%.

Growth plans

After a period of disruption and adjustment, Telstra has also outlined that it expects to grow profit in the coming years.

Telstra said that to FY25, it's expecting to achieve a compound annual growth rate (CAGR) of mid-single digits for underlying earnings before interest, tax, depreciation and amortisation (EBITDA). It expects high teens for underlying earnings per share (EPS).

The telco wants to cut costs. Outgoing Telstra CEO Andrew Penn said:

Our financial ambition is to maintain leading operating cost metrics for a full service telco through capex (capital expenditure) discipline and efficiency and cost reduction from completing the decommissioning or exiting of legacy IT systems.

We will deliver a further $500 million of cost reductions on top of the $2.7 billion already committed for T22, while at the same time investing for growth. The profitable growth of our health and energy businesses at scale will also contribute to our future success.

The company is also working on expanding its market leadership to help the business grow. The 5G network coverage will be extended to 95% of the population. Also in the T25 strategy, Telstra says it will expand regional coverage with 100,000 square kilometres of new 4G and 5G coverage.

Telstra has also signed a regional sharing agreement with TPG Telecom Ltd (ASX: TPG). Penn said the innovative deal would "realise more value from Telstra's network infrastructure for shareholders while making a very significant contribution to Telstra's wholesale mobile revenue."

Are Telstra shares a buy?

The Telstra share price is rated as a buy by the broker Ord Minnett, with a price target of $4.50. Realising the value of its assets could be a boost.

The broker thinks Telstra shares are valued at 22x FY23's estimated earnings.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended TPG Telecom Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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