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What did Telstra tell us about its dividend today?

Sebastian Bowen

What did Telstra Corporation Ltd (ASX: TLS) tell us about its dividend today?

Given that TLS shares are up 2.71% today at $3.71 a share (at the time of writing), it’s clear the market is responding well to the ASX’s largest telco.

Telstra shares had a phenomenal run over most of 2019 – rising from $2.77 in January to over $4 by August. However, this momentum seemed to stall shortly afterwards, and Telstra shares have been trending lower ever since, hitting $3.40 by September and hovering around the $3.50–3.60 range until this week.

The source of this goodwill was an investor day presentation the company hosted this morning. In this presentation, Telstra reaffirmed its FY20 earnings guidance, in which it expects to see its underlying earnings before interest, taxation, depreciation and amortisation (EBITDA) increase by $500 million. This number excludes the ongoing impact of the NBN, which has been wreaking havoc on Telstra’s books for years now.

It appears that Telstra’s T22 cost cutting strategy, which was announced a few years ago, has been making significant progress and is on track for cumulative savings of around $2.5 billion by FY22.

What about Telstra’s dividend?

More importantly for shareholders, Telstra also reaffirmed that it expects free cash flow to come in between $3.3 billion and $3.8 billion for FY20. Whilst Telstra did not provide any guidance for its 2020 dividends today, we can look back and see the company’s FY19 dividends amounted to a cost of $2.259 billion. This indicates to me there is more than enough free cash flow to sustainably cover a continuation of Telstra’s current 16 cents per share payout going forward.

That will be good news for long-term shareholders who have endured big cuts to their TLS dividend payments in recent years.

Foolish takeaway

Nothing is certain in investing, but from where I’m looking, Telstra’s dividend payments look very sustainable at their current levels. Unless a major shock or black swan event hits Telstra down the road, I can see a path back to growth for the Telstra dividend going forward looking at today’s numbers.

The post What did Telstra tell us about its dividend today? appeared first on Motley Fool Australia.

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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 Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019