Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) both have a reputation as big dividend payers, but which is the better dividend buy?
As a reminder, Telstra is Australia’s largest telecommunications business and Commonwealth Bank is Australia’s biggest bank.
The first thing to consider is which one has the biggest dividend.
The Dividend Yield
Telstra has a historical fully franked dividend yield of 7.5%, which rises to 10.8% when franking credits are included.
Commonwealth Bank has a historical fully franked dividend yield of 6%, which rises to 8.5% including the franking credits.
I mentioned that the yields are ‘historical’ because past dividends are not a guarantee of future dividends.
The Safety of the Dividend
Telstra has reduced its dividend because its payment to shareholders was too large. It recently changed its dividend policy to a more sustainable level of 70% to 90% of underlying profit, as well as 75% of future net one-off NBN receipts to shareholders through fully franked special dividends.
In FY18 Telstra generated profit per share of 30 cents, so its 22 cents annual dividend was a 73.3% payout ratio (in-line with its policy). Some analysts believe the dividend may be reduced further given that its profits may fall from here.
Commonwealth Bank generated profit per share (EPS) of $5.286 and paid an annual dividend of $4.31, which represents a payout ratio of 81.5%. Commonwealth Bank hasn’t decreased its dividend since the GFC, so you could say it has a better history of stability.
Bottom line: A dividend is only as safe as the underlying profit over the long-term.
Are the Telstra and CBA Profits Sustainable?
Both Telstra and CBA have a strong customer base who pay their phone bill and mortgage payments monthly. This is a good source of recurring cash flow for both of them – meaning, the dividend has a higher chance of being sustainable.
Having said that, Telstra is facing some structural problems. For example, it lost control of Australia’s copper cable infrastructure, so it now has to compete with everyone else through the NBN. In the mobile space, there are many low-cost competitors offering big data packs for low prices. Telstra continues to increase its data bundles for the same cost.
Commonwealth Bank is suffering problems too. It has suffered a large reputation hit from the Royal Commission, there are more online-only loan competitors, and the falling housing market could lead to rising bad debts.
Which one is the Better Dividend Buy?
I don’t think either blue chip can be counted as a great investment at this time.
If I were forced to choose one it would probably be Telstra. Over the next few years, Telstra has 5G mobile to look forward to and it’s also the only foreign telco that can operate in China, so there are reasons why profit might grow. I don’t see the same positive catalysts for Commonwealth Bank.
In summary, neither CBA nor Telstra may be dependable dividend payers over the next few years, so I think it might be better to go for reliable ASX shares, such as the ones in the free report below.
[ls_content_block id=”14945″ para=”paragraphs”]