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Why the Telstra (ASX:TLS) share price soared 4% today

The Telstra Corporation Ltd (ASX: TLS) share price has soared today, up 4%. Is the Telstra share price a buy as a result, or is it too late?
The post Why the Telstra (ASX:TLS) share price soared 4% today appeared first on Motley Fool Australia. –

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The Telstra Corporation Ltd (ASX: TLS) share price has had a fantastic day today, soaring 4.32% to $2.90 per share by market close. It’s a welcome turnaround for Telstra shareholders. They have had to watch the telco’s share price drift lower and lower over the past two months, culminating in a new 52-week low of $2.76 that was hit just last week. But even after today’s decisive move, the Telstra share price remains a long way from its 52-week high of $3.94. So why are Telstra shares jumping today? And more importantly, is the telco a buy right now?

Why the Telstra share price surged today

Well, in my view, we can comfortably assume it was all because of the annual general meeting (AGM) notes Telstra released to the market today. The company held its AGM this morning and provided investors with some much-needed certainty around its cherished dividend

Telstra is a favourite of ASX dividend investors due to its steady cash flow and relatively high annual payouts. Its 2020 dividends amount to 16 cents per share (cps). That, on current prices, gives Telstra a trailing dividend yield of 5.52% – or 7.89% grossed-up with Telstra’s full franking credits.

In Telstra’s earnings report for the 2020 financial year that was released in August, the company appeared to cast doubt over whether the 16cps payout would be maintained in FY2021. That’s because Telstra has a ‘payout ratio’ policy of aiming to pay out between 70% to 90% of its earnings every year as dividends. In the FY20 earnings report, Telstra forecast that its FY2021 earnings would be insufficient to cover a 16cps dividend. This led investors to sell off Telstra shares ever since in the belief the company would deliver a dividend cut next year.

Dividend back on the table

However, in its AGM notes, Telstra appeared to backtrack on this position. Here’s some of what Telstra Chair, John Mullen, had to say this morning on the topic:

The board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70-90% of underlying earnings to maintain a 16c dividend.

In short, this is good news for dividend investors, and why I believe the Telstra share price pushed higher today.

Are Telstra shares a buy today?

I think this position taken by Telstra’s management is extremely good news for Telstra shareholders. In my opinion, it means that dividend investors should reconsider Telstra today. Telstra is still going through some painful restructuring, which has, in large part, been caused by the ongoing NBN rollout.

However, I think the company’s next-generation 5G plans are very exciting. 5G should open up some lucrative growth avenues over the next decade. In the meantime, Telstra’s defensive earnings base should be able to cover a 16cps dividend well into the future. Especially considering what the company has said today. Thus, if a near 8% grossed-up dividend is important for your investing goals, I think Telstra is indeed a solid buy today.

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Returns As of 6th October 2020

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. 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 Why the Telstra (ASX:TLS) share price soared 4% today appeared first on Motley Fool Australia.

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