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The Retail Food Group Limited (ASX: RFG) share price has jumped 4.69% this morning after the company announced it was selling its Dairy Country business.

Retail Food Group’s share price is trading at 6.7 cents at the time of writing. In comparison, the broader All Ordinaries Index (ASX: XAO) is down 0.9% to 6,033 points.

Retail Food Group is a global food and beverage company that operates in the bakery/cafe division, coffee retail, and manufacturing and distribution operations.

Since it was established in 1989, Retail Food Group has grown to become Australia’s largest multi-brand retail food and beverage franchise owner, servicing more than 1,150 locations.

Dairy Country sale

The company announced it was selling the business and assets of its subsidiary, Dairy Country, to Fonterra Brands for $19.23 million. This is expected to benefit Retail Food Group in a number of ways.

Net proceeds from the sale will be used to extinguish Dairy Country’s working capital facility, and to make a further repayment of Retail Food Group’s debt obligations. This will free up the company’s cash flow and allow it to respond to the evolving retail landscape affected by COVID-19.

Settlement is expected by October 2020, pending net working capital adjustments and conditions such as a foreign investment review board approval.

What did management say?

Executive chair Peter George was optimistic about the sale re-aligning the group’s core values and strategic interests. He said:

Dairy Country has represented a reliable past contributor to group earnings, however, is no longer considered an appropriate fit with RFG’s strategic intent to focus its resources on the company’s core retail food franchising and coffee businesses.

Mr George added the sale would give the company more flexibility within its balance sheet, saying:

The transaction facilitates the company’s exit from foodservice and manufacturing pursuits, providing the group with a less complex business model that enables RFG to dedicate its resources towards driving positive outcomes for its franchisee community, and building value for its wholesale coffee business following its FY20 restructure.

About the Retail Food Group share price

The Retail Food Group share price has regained 146% since its March low of 2.6 cents. However, since the beginning of the calendar year, the Retail Food Group share price is trading 35% lower.

More reading

• Myer (ASX:MYR) share price dives 15% as FY20 results fail to impress
• 4DS Memory (ASX:4DS) share price rockets 46% higher today
• Why Brainchip (ASX:BRN) shares are topping the ASX today
• ‘We could be heading for a lot of pain’
• The Castillo Copper (ASX:CCZ) share price is up 140% in 2020. Here’s why.

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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The S&P/ASX 200 Index (ASX: XJO) is on course to end the week on a very disappointing note. At the time of writing the benchmark index is down 0.85% to 5,858.7 points.

Four shares that have fallen more than most today are listed below. Here’s why they are tumbling lower:

The BrainChip Holdings Ltd (ASX: BRN) share price has crashed 13.5% lower to 65.5 cents. This decline appears to have been driven by profit taking after some stellar gains by the artificial intelligence technology company’s shares. While BrainChip is an exciting company, it still has an enormous amount to prove. So, it isn’t at all surprising to see its shares come crashing lower. Especially given its billion-dollar market capitalisation on next to no revenue.

The Evolution Mining Ltd (ASX: EVN) share price is down almost 3% to $5.62. This follows a pullback in the spot gold price overnight. It isn’t just Evolution that is under pressure. A number of popular gold miners are dropping notably lower today. This has led to the S&P/ASX All Ordinaries Gold index dropping 1.9% this morning.

The Nearmap Ltd (ASX: NEA) share price has returned from its trading halt and is down over 11% to $2.56. This morning the aerial imagery technology and location data company announced the successful completion of its fully underwritten institutional placement. Nearmap raised $72.1 million at a 4.2% discount of $2.77. These funds will be used to support its growth. In addition to this, Goldman Sachs downgraded its shares to a neutral rating this morning.

The Zip Co Ltd (ASX: Z1P) share price has continued its slide and is down a further 7.5% to $5.94. As well as getting caught up in the tech selloff, concerns over increasing competition appear to be weighing on Zip’s shares. Two of the big four banks have announced interest free credit cards this week to compete with buy now pay later providers.

More reading

• Nearmap (ASX:NEA) share price tumbles 11% following capital raising
• A guide to using the dollar-cost averaging strategy
• Is the Zip (ASX:Z1P) share price a buy in the tech crash?
• 5 things to watch on the ASX 200 on Friday
• ASX 200 rises 0.5%, gold miners glitter

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. and ZIPCOLTD FPO. The Motley Fool Australia has recommended Nearmap Ltd. 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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The Nearmap Ltd (ASX: NEA) share price is down 11.07% in mid-morning trading after emerging from yesterday’s trading halt. At the time of writing, the Nearmap share price has fallen to $2.59 after closing yesterday’s session at $2.57.

Nearmap requested the trading halt following its ASX announcement of a capital raising.

The $90 million capital raising is comprised of a $20 million share purchase plan and a $70 million institutional placement. Nearmap stated it plans to use the funds to increase its investments in sales and marketing, with a focus on its dominant market in North America.

The company also plans to accelerate the roll out of its next generation camera systems, HyperCamera3, and potentially expand its operations into new geographic locations.

What does Nearmap do?

Nearmap was founded in 1998 in Perth. The company provides high resolution aerial imagery technology and location data for companies and government customers across Australia, the United States, Canada and New Zealand. Its technology allows customers to conduct detailed virtual site visits rather than needing to fly to and over the locations in person.

Nearmap shares first traded on the ASX in 2000. Today, the company has a market capitalisation of $1.3 billion.

What Nearmap’s CEO Rob Newman told us about the capital raising

I caught up with Nearmap’s CEO, Dr Rob Newman, via Zoom yesterday afternoon to get his views on the company’s $90 million capital raising.

Firstly, I wanted to find out the rationale behind the timing of the capital raising.

Newman explained:

We think this is a really good time for us to accelerate our growth and this additional capital will allow us to do that. We see a very strong opportunity (to grow) in North America; it’s been there all the time.

As you know, the last 6 months have been quite disruptive globally. What we’ve found, looking back at how our business has performed over the past 6 months, is that our business is very resilient, that we continue to grow. We’re seeing specific opportunities in those verticals which I mentioned in the release: insurance, government and roofing.

In the release, Newman stated that these three verticals “have benefitted from the increasing attractiveness of our premium content types and we see a significant opportunity for Nearmap to establish a leadership position in each.”

Newman told me that somewhat less than a third of the new capital will go into sales and marketing in the short term to support these three verticals. Though he noted that, “As the business continues to grow, we’ll continue to invest in sales and marketing.”

$15 million is allocated to accelerate the roll out of Nearmap’s next generation HyperCamera3.

Newman said:

If we hadn’t allocated $15 million to the roll out (of HyperCamera3), we’d have to roll them out in ones or twos. These systems cost somewhere around half a million dollars each. With this capital we can roll out a significant amount of systems and really increase our coverage in North America and allow us to go to Europe if we choose to.

Having mentioned Europe, Newman stressed that the capital raising won’t have any direct influence on Nearmap’s expansion into the continent. However, the company is happy to accommodate its existing customers if they want content in Europe. Newman added that, “HyperCamera3 will be a much more productive system given the weather in large parts of Europe, so that certainly will help us expand into that market.”

As for Nearmap’s growth outlook, Newman pointed out that, “We’ve previously guided that our growth rate would be somewhere between 20–40%. And if you look at where most of the analysts have it, it’s much more towards the bottom end of that range.”

Following its capital raising, however, Newman says the company can now “grow at a much faster rate” and see a push up in that guidance rate, though that accelerated growth likely won’t begin to materialise until next year, as Nearmap makes the investments.

Finally, I wanted to know how Nearmap determined the $70 million to $20 million split between the institutional placement and the share purchase plan.

Newman explained:

We do a lot of analysis on the amount of capital we require. We know we need to lock in the $70 million, so that’s underwritten, committed from our banking partner. Then with the additional $20 million, obviously we want to be fair to our retail shareholders so they can participate in this as well. Now that’s not committed; we’re not committing our retail shareholders, but giving them an opportunity to invest on very good terms. (Either) the lower of the price that we do today (yesterday) or a discount to the weighted average at the end of this share purchase period.

It’s a nice way to balance getting the commitment to the capital that we need from the institutional investors and also being fair to our retail shareholders. And we’d like to get that extra $20 million because that would allow us to accelerate even more.

Newman said Nearmap is very confident in the state of its business.

Despite today’s selloff, the Nearmap share price is up 2.39% year to date, overcoming a crushing 64% fall during the COVID-19 panic selling.

More reading

• Why BrainChip, Evolution, Nearmap, & Zip shares are tumbling lower
• 5 things to watch on the ASX 200 on Friday
• ASX 200 rises 0.5%, gold miners glitter
• ASX 200 up 0.7%: Nearmap (ASX:NEA) launches capital raising, Afterpay (ASX:APT) rebounds
• Nearmap (ASX:NEA) share price halted for $90 million capital raising

Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. The Motley Fool Australia has recommended Nearmap Ltd. 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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In late morning trade the S&P/ASX 200 Index (ASX: XJO) has followed the lead of U.S. markets and is on course to record a disappointing decline. The benchmark index is currently down 0.95% to 5,852.6 points.

Four shares that have not let that hold them back today are listed below. Here’s why they are pushing higher:

The IGO Ltd (ASX: IGO) share price is up 2.5% to $4.50. This follows an announcement by the nickel producer that it is exploring options for its 30% holding in the Tropicana gold mine. It has received unsolicited enquiries regarding the asset and management is now looking into various opportunities to unlock value for shareholders.

The IPH Ltd (ASX: IPH) share price has climbed over 2% to $6.96 despite there being no news out of the intellectual property services company. The IPH share price has been a positive performer this week during the market volatility. Investors may be attracted to its defensive earnings and relatively modest valuation.

The Jumbo Interactive Ltd (ASX: JIN) share price has stormed 4% higher to $14.37. This gain could be in relation to the online lottery ticket seller benefiting from a series of large jackpots recently. In addition to this, with its shares almost halving in value from their 52-week high, investors may believe they are in the bargain bin at present.

The Whitehaven Coal Ltd (ASX: WHC) share price has climbed 3% to 87.2 cents. Investors have been buying the coal miner’s shares after a rise in the thermal coal price overnight. According to CommSec, the spot thermal coal price lifted by 1.9% to US$49.75 per tonne during overnight trade. Bargain hunters may also be swooping in on Friday. Even after today’s gain, the Whitehaven Coal share price is down a massive 75% from its 52 week high.

More reading

• IGO share price surges on potential sale of Tropicana
• ASX 200 drops over 2%, tech and oil fall
• Why BrainChip, Codan, IPH, & Nufarm shares are climbing higher today
• Why Jumbo, St Barbara, Sydney Airport, & Uniti shares are dropping lower
• 5 things to watch on the ASX 200 on Tuesday

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive 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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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

On Thursday, shares of electric-car maker Tesla Inc (NASDAQ: TSLA) continued to rebound from their worst one-day sell-off on record earlier this week. The stock jumped as much as 8.9%, but as of 11:15 a.m. EDT yesterday, it had settled to about a 6% gain. Tesla stock closed the day 1.38% higher.

The move higher on Thursday extends Wednesday’s rally for the growth stock. Based on this two-day rebound, investors seem to believe that Tesla shares were oversold during a big sell-off on Tuesday, creating a buying opportunity.

So what

Until Wednesday, Tesla was seeing significant selling pressure this month. The stock appeared to be taking a breather after a wild run higher. It had gained about 500% between the end of 2019 and 31 August – a move that seemed to persuade some shareholders that it was time to do some profit-taking.

But after the September sell-off worsened on Tuesday, when the stock slid about 21% in a single day, some investors appear to be aggressively buying shares.

Now what

While Tesla is still down 19% in September, investors should keep in mind that the growth stock certainly isn’t cheap. The company trades at about 17 times sales, up from a multiple of about eight as recently as a few months ago and a multiple of three just last year. With the stock’s valuation changing so quickly, continued volatility is almost inevitable. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• The biggest threat to tech shares
• Tech shares lead ASX rebound but Afterpay (ASX:APT) faces mounting competition
• Correction or crash for ASX 200 shares?
• ‘We could be heading for a lot of pain’
• Tech share prices are down but not out. When should you buy?

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. 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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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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On Friday morning the JB Hi-Fi Limited (ASX: JBH) share price is trading lower following general market weakness after another poor night on Wall Street.

While this is disappointing, easing the blow for shareholders is the fact that today is the day they will be paid the retail giant’s 90 cents per share fully franked final dividend.

While some shareholders may use these funds as income to live from, others may wish to invest the money back into the share market.

For the latter group, here are three ASX shares I would invest these dividends into:

Kogan.com Ltd (ASX: KGN)

If you’re interested in investing these funds into a growth share, then you might want to consider Kogan. I think the ecommerce company would be a great long term option for investors due to continued shift to online shopping. In addition to this, its expansion into potentially lucrative verticals, the growing Kogan Marketplace, and potential value accretive acquisitions should support its earnings growth in the future.

SEEK Limited (ASX: SEK)

Looking for a blue chip ASX share to invest these funds into? Then I believe this job listings giant could be a top option. Although the immediate term will be very tough because of the pandemic, I believe SEEK has the potential to be a strong performer over the long term. This is thanks to its dominating ANZ business and its rapidly growing Chinese operation. All in all, I feel confident the company will deliver on its aspirational revenue target of $5 billion later this decade. This represents a big increase on the revenue of $1,577.4 million it posted in FY 2020.

Telstra Corporation Ltd (ASX: TLS)

If you’re interested in generating even more dividends in the future, then I think Telstra would be worth considering. I think its shares are great value given its positive medium term outlook, defensive qualities, and generous dividend yield. In respect to the latter, I’m confident that Telstra will maintain its 16 cents per share dividend in FY 2021 by adjusting its policy to a free cash flow based one. If it does this, it will provide investors with a fully franked 5.6% dividend yield.

More reading

• Is the Telstra (ASX:TLS) dividend sustainable? This analysts thinks it is
• 5 things to watch on the ASX 200 on Friday
• Why I would buy Telstra (ASX:TLS) and this outstanding ASX 50 share
• Why I would buy Telstra (ASX:TLS) and 1 other ultra-cheap ASX share today
• Why you shouldn’t be concerned by the high PE multiples of ASX tech shares

James Mickleboro owns shares of SEEK Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Kogan.com ltd and SEEK 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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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The global smartphone market has had the worst year in its history, primarily on account of the COVID-19 pandemic that has decimated discretionary spending while simultaneously disrupting consumer electronics supply chains. Total shipments have seen the biggest drops in history throughout 2020, with some markets like India even getting cut in half.

Some smartphone manufacturers have already started to release handsets equipped with 5G, and Apple Inc‘s (NASDAQ: AAPL) highly anticipated foray into 5G this year could help save the market.

Bouncing back in 2021

Canalys released its latest estimates for the worldwide smartphone industry this week, with total unit volumes for 2020 expected to decline by 11%. Total 5G smartphone shipments this year are forecast to be approximately 280 million, driven by relatively affordable 5G handsets being sold in China, the largest smartphone market in the world. Hopefully, 5G product releases at the end of 2020 will spur momentum heading into 2021, when total volumes should bounce back by 10% to 1.3 billion.

“Gradual reopening of offline stores, improving logistics and production have provided necessary uplift for most markets to move into a more stabilized second half of 2020,” Canalys senior analyst Ben Stanton said in the release. “And with the holiday season about to kick off, there is no doubt 5G is about to be thrust into spotlight.”

Commoditisation of 5G phones in China, which helps bring prices down, will be crucial in boosting demand this year, according to Canalys. 5G smartphones that cost $400 or less are expected to account for nearly 60% of total smartphone volumes in China in 2021, a much higher proportion than in other mature markets like North America or Europe. Note that Apple tends to have a stronger position in developed markets and its flagship 5G iPhones this year will cost well above $400.

“Fairly aggressively-priced 5G devices are already available in Europe, such as the Motorola G 5G Plus, and the Xiaomi Mi 10 Lite 5G,” Stanton added. “But with many Apple-centric markets, such as the UK, there is a large base of customers willing to wait for an iPhone with 5G.”

Average selling prices (ASPs) of 5G handsets sold in Europe should steadily decline as well due to competition, with Canalys modeling that figure at $765 in 2021 and $477 in 2024.

Even though many wireless carriers around the world are still in early stages of 5G deployments and there are important nuances regarding the types of speeds that 5G can offer, carriers and smartphone manufacturers are doing a good job in creating interest and hype around the next-generation technology, which will push 5G penetration higher. Canalys analyst Shengtao Jin expects 5G penetration in China to top 80% within the next year.

Canalys estimates that total 5G shipments will soar by 95% to reach 544 million in 2021, which would represent over 40% of all units sold.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Correction or crash for ASX 200 shares?
• Tech share prices are down but not out. When should you buy?
• 3 ASX high-growth ETFs growth investors can’t ignore
• 4 things learned from Apple and Tesla stock splits
• ASX 200 Weekly Wrap: Friday crash pulls ASX back below 6,000 points

Evan Niu, CFA owns shares of Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia has recommended Apple. 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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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Freedom Foods Group Ltd (ASX: FNP) share price has been suspended from trade since 24 June following the shocking developments that occurred at the diversified food company over the last 12 months.

However, this morning it took a step forward towards returning to the ASX boards in the not so distant future.

What did Freedom Foods announce?

According to the release, Freedom Foods has secured the ongoing support of its principal lenders and majority shareholder. This ensures access to financial facilities while the company undertakes its planned recapitalisation.

Freedom Foods has agreed a standstill deed with its two main lenders, HSBC and National Australia Bank Ltd (ASX: NAB), regarding financing facilities with those lenders.

This agreement is effective until 30 November 2020 and is subject to the company meeting certain milestones relating to the progression of its recapitalisation plan.

In addition to this, with the support of a guarantee from an entity related to majority shareholder Arrovest Pty Limited, HSBC and NAB have also agreed to continue to make certain liquidity facilities available to the company during the standstill period.

Freedom Foods’s Interim Chief Executive Officer and major shareholder, Michael Perich, commented: “We are grateful for the ongoing support of our financiers and our majority shareholder. These agreements provide us with the financial support and flexibility we need to ensure the business continues to perform at its best while we pursue recapitalisation options.”

What now?

The company is currently being advised on its strategic options by Moelis Australia and its shares will remain in voluntary suspension until at least 30 October 2020 at the company’s request.

Until then, the company intends to continue to keep investors up to date with material developments in accordance with its continuous disclosure requirements.

More reading

• Why the Retail Food Group (ASX:RFG) share price is up 4%
• Why BrainChip, Evolution, Nearmap, & Zip shares are tumbling lower
• Nearmap (ASX:NEA) share price tumbles 11% following capital raising
• Why IGO, IPH, Jumbo, & Whitehaven shares are pushing higher today
• Why Tesla stock jumped again on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Freedom Foods Group 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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The IGO Ltd (ASX: IGO) share price is a rare bright spot on the market today as it considers putting its stake in Tropicana on the auction block.

Shares in the miner jumped 4.8% to $4.61 in early trade when the S&P/ASX 200 Index (Index:^AXJO) tumbled 1.2%.

Other mining stocks also lost ground as commodities retreated. The OZ Minerals Limited (ASX: OZL) share price fell 1.4% to $14.40, the Rio Tinto Limited (ASX: RIO) share price slipped 0.6% to $99.86 and BHP Group Ltd (ASX: BHP) gave up 1.3% to $36.49.

Sun shines on Tropicana sale

But investors were clearly taken with IGO’s decision to explore options for its 30% holding in the Tropicana gold mine.

Tropicana is a pain in the posterior for shareholders. It was a blemish on IGO’s otherwise pleasing full year profits that was boosted by its outperforming Novo nickel mine.

It seems management may be finally biting the bullet and there’s no better time to flog an underperforming asset than during a bull run.

Unlocking value in the IGO share price

The gold price is trading near record highs of just over US$2,000 an ounce and IGO confessed that unsolicited suitors have been knocking on its door.

This prompted management to undertake a strategic review of Tropicana, which will involve an analysis of various opportunities to unlock value in the asset.

This doesn’t only include selling it off to the highest bidder but to look at underground development and exploration.

IGO will work with its joint venture partner on Tropicana, AngloGold Ashanti Australia, to undertake the review.

IGO to focus on green energy

Investors should stay tuned as this work is expected to be completed in three to six months. That’s also enough time to firm up any offers for the asset.

“Tropicana is clearly a high-quality and significant asset within IGO’s portfolio, however IGO’s strategic focus is on commodities that are critical to clean energy,” said its CEO Peter Bradford.

“In the current gold price environment, we do not believe that IGO’s share price fully reflects the value of Tropicana.”

IGO generates most of its earnings from nickel, which is a key ingredient in the manufacture of batteries.

Is the IGO share price at a turning point?

The miner reported record FY20 revenue and underlying free cash flow of $892 million and $311 million, respectively.

Despite this, IGO is underperforming many of its peers. The IGO share price is down close to 30% over the past year when others like OZ Minerals have rallied by over 50%.

More reading

• Rio Tinto (ASX:RIO) announces CEO exit following Juukan destruction
• Up 9.2% in 1 day, is the Clinuvel Pharmaceuticals (ASX:CUV) share price a buy?
• 5 things to watch on the ASX 200 on Friday
• ASX 200 rises 0.5%, gold miners glitter
• Why the Rio Tinto share price is outperforming its peers

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, OZ Minerals Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. 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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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.”

More reading

• Why I would buy Telstra (ASX:TLS) and this outstanding ASX 50 share
• Why I would buy Telstra (ASX:TLS) and 1 other ultra-cheap ASX share today
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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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