Telstra Corporation Ltd (ASX: TLS) may offer a dividend yield of around 6.3% when including the franking credits in the calculation.
How will Telstra pay a 6.3% yield?
Telstra has been paying an 8 cent per share dividend every six months for a few years. The board seem quite intent on paying that again for the full year result in a few months.
Without the franking credits, Telstra’s yield is 4.5%. With the franking credits included, it goes up to 6.3%.
That dividend isn’t as big as it was a few years ago – the annual dividend used to be above $0.30 per share. But it doesn’t seem as though it’ll get back there for some time.
It has lost a lot of profit to the NBN. The telco giant used to own all of the cable infrastructure, which the NBN is now using and charging a lot for it. That means the Telstra margins are now much lower.
Not only that, but Telstra mobile customers are getting much better value these days because of all the low price competition that.
Can things get better?
Telstra is working on a number of things as part of its T22 strategy. One of the main elements of that is cost cutting. Thousands of jobs have gone. The aim is to increase margins and make the business more efficient.
In FY21 Telstra is expecting underlying EBITDA (EBITDA explained) to be between $6.6 billion to $6.9 billion. Telstra’s CEO, Andy Penn, has set some ambitious goals over the next couple of years. He wants Telstra to grow its underlying EBITDA (EBITDA explained) by mid to high single digits in FY22. In FY23, Mr Penn wants Telstra’s underlying EBITDA to be between $7.5 billion to $8.5 billion.
5G could be a very important factor for the business. Telstra has the chance to rebuild its competitive position compared to peers if it can offer the best 5G service. This may have the chance to unlock further revenue growth in the coming years. It would be particularly good for Telstra if NBN connections can be replaced in homes by 5G-powered wireless broadband. That would lead to much higher margins per home connection.
Just purely thinking about the dividend, Telstra may be able to keep paying a consistent dividend as long as its profit doesn’t drop much further. That may make it a good dividend share in some eyes.
However, I’m looking for growth from my ASX dividend shares. Both in terms of dividend growth and long-term capital growth from improvements in profits or asset values. I have my eyes on other ideas for income.
