Australia’s biggest telco, Telstra Corp. [ASX:TLS], dropped 1.28% this morning to $4.24 per share. The billion-dollar telco is now down 16.76% for the year.
Why are Telstra’s shares plummeting?
Telstra hasn’t had a great first half. Profits took a hit, dropping 11.8% to $1.79 billion. Short-term borrowings also increased, while shareholders’ equity declined. The telco also hasn’t fared well against rising competitive tension.
And now even Telstra’s iconic high dividends are coming into question. As reported by The Australian Financial Review:
‘According to Mr Kaynes [Citi analyst], Telstra has few options other than to cut its dividend per share forecast from 31 cents to 25 cents in the next financial year as it looks to counter the looming earnings hole.’
Kaynes believes Telstra’s dividend might dip as low as 17 cents a share by FY2020. But rather than wait three years, Telstra should cut their dividends now and redirect the funds back into the business, Kaynes reasons.
‘We believe shareholders would be better off in the (longer term) if the (dividend per share) was cut now and the excess fund directed to either share buybacks or growth-generating acquisitions’.
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What now for Telstra?
Telstra does look attractive at present. The shares are beaten down and now trade at 13.3-times FY17 earnings on a 7.30% dividend yield.
Yet though it looks great now, what would happen if dividends get cut or earnings decline further? Because of Telstra’s uncertain future, I suggest you consider looking for opportunities elsewhere.
Junior Analyst, Money Morning
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