The Telstra Corporation Ltd (ASX: TLS) share price has continued its post-results slide on Friday.
In morning trade the telco giant’s shares are down a further 1% to $3.07.
Why is the Telstra share price tumbling lower?
Telstra’s shares have come under pressure since the release of its results due to concerns over the sustainability of its 16 cents per share dividend.
This is because Telstra’s guidance for FY 2021 shows that its earnings will be impacted more than expected by the COVID-19 pandemic. This suggests that its current dividend could be at risk based on its current policy.
Telstra commented: “We remain clear that, adjusted for recent accounting changes, our EBITDA, post the nbn, needs to be in the order of $7.5 – 8.5 billion to pay a dividend around 16 cents under the 70 to 90 percent payout ratio in our capital management framework.”
This compares to its guidance for underlying EBITDA in the range of $6.5 billion to $7 billion.
Is the dividend in danger?
While the above doesn’t look good, it is worth noting that Telstra pointed out that its free cash flow is higher than its accounting earnings.
This means Telstra could shift its dividend policy to a free cash flow based one in order to maintain its current dividend. Which is arguably more appropriate at this point.
Goldman Sachs appears optimistic that this will be the case and continues to forecast a 16 cents per share dividend in FY 2021.
It commented: “Although 16cps is now unsustainable across FY21-22 on the existing payout policy, we note TLS further shifted its dividend focus to FCF ( i.e. TLS justified the 99%, out-of-policy EPS payout as this was well supported by cashflow). Hence we have not revised our 16c dps, believing Telstra will maintain this through FCF, if it believes that is on track for $7.5bn by FY23E.”
In light of this, the broker has held firm with its conviction buy rating, albeit with a slightly reduced price target of $3.90.
I agree with this view and feel it is worth taking advantage of the pullback in the Telstra share price to invest.
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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.
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