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Is the Telstra (ASX:TLS) dividend sustainable? This analysts thinks it is

Here’s why the Telstra Corporation Ltd (ASX:TLS) dividend could be sustainable and its shares might be bargain buys right now…
The post Is the Telstra (ASX:TLS) dividend sustainable? This analysts thinks it is appeared first on Motley Fool Australia. –

Telstra

The Telstra Corporation Ltd (ASX: TLS) share price has been a particularly poor performer over the last few weeks.

Since this time last month the telco giant’s shares have fallen a disappointing 16%.

Why is the Telstra share price sinking lower?

Investors have been selling Telstra’s shares following the release of its full year results for FY 2020.

Although the company delivered a solid result which was in line with its guidance, its commentary on the year ahead spooked investors.

Especially given how its earnings guidance implies that its 16 cents per share dividend would not be sustainable.

As I have mentioned many times before, I believe the selloff has been unjustified and that Telstra could still maintain its dividend if it changes its dividend policy to be based on its free cash flow instead of earnings. This is because the former is now a lot higher than the latter due to its accounting.

One analyst that agrees with this is James Gerrish from Shaw and Partners.

What did Shaw and Partners say?

On LiveWire Markets Mr Gerrish revealed that Shaw and Partners added Telstra to its income portfolio this week on the belief that its dividend is sustainable.

He said: “On an earnings basis, the 16c dividend is not sustainable given TLS will likely generate around 14c EPS in FY21 & FY22 before rising from there, however TLS have shifted their dividend focus to be more heavily aligned with free-cashflow (FCF). In terms of that number, which seems to now be the key for the dividend, it’s expected to be around 23c in FY21 & FY22 and rising from there.”

Shaw and Partners feels the market is being unnecessarily bearish and this is a buying opportunity for investors.

Mr Gerrish added: “Given the rhetoric around free-cash-flow that we saw at the recent result, it seems likely that the market is too bearish on the sustainability of the TLS dividend given its being anchored to EPS, not FCF.”

“While earnings are under some pressure, they are expected to improve over the coming years (I know I know – it’s been like this for ever), however worth bearing in mind that TLS have made some tough decisions in recent times to get the business on a better footing to deliver that much anticipated growth,” he explained.

Where is the Telstra share price heading?

Shaw and Partners appears to see $3.50 as fair value if it sustains its dividend and I would have to agree with that.

The analysts concluded: “In broad terms, a sustainable dividend we think is enough to support the share price up to about a 4.5% yield which equates to a SP around $3.50, then if earnings can show some growth, we think there is a very plausible path for TLS to trade back up towards $4.00.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is the Telstra (ASX:TLS) dividend sustainable? This analysts thinks it is appeared first on Motley Fool Australia.

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