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Lonsec Research   ⟩   News & Insights   ⟩   Media releases   ⟩   Beware the dividend honeypot—the lesson of Telstra
Peter Green

AuthorPeter Green

TitleGeneral Manager, Australian Equities

DateJuly 5, 2018

CategoryMedia releases, News

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Shareholders burnt by Telstra’s dividend cut and spiralling share price should be wary of high yield shares with attractive dividends but shaky fundamentals. Telstra sparked an exodus of investors after announcing a cut in its dividend from 15.5c per share to 11c, with the challenges facing Australia’s major telco suddenly made palpable to mum and dad investors.

The lesson of Telstra is that investors should not invest purely for income or tax advantages (i.e. franking credits) at the expense of sound fundamentals. Despite being stuck in a downward trend since mid-2015, investors tolerated the stock’s poor performance so long as it maintained its attractive fully franked dividend.

The dividend cliff (TLS dividend $ per share)

*Expected

Source: Lonsec, Bloomberg, Telstra

The problem is that by the time a company is forced to cut its dividend, fundamentals have already deteriorated. In other words, investors waiting for the dividend cut as a signal to bail were already too late. While Telstra has confirmed a semi-annual dividend of 11c, FY19 guidance is vague, stating it will pay a dividend in the range of 70 to 90% of underlying earnings.

Telstra share price and P/E ratio

Source: Lonsec, Bloomberg

Since the end of its final privatisation, Telstra was the darling of mum and dad investors, who saw Telstra as a ‘national champion’ that could provide sustainable income over a long period of time. Telstra’s fundamentals came under threat in the form of competition from the NBN and other players like TPG, diminishing fixed-line revenue, and a crippling bureaucracy.

Telstra’s new strategy, named Telstra2022, splits out the telco’s infrastructure into a separate business and aims at reducing costs and improving customer service. Whether investors consider re-entering Telstra should depend on whether this strategy can improve the telco’s long-term prospects, rather than the success of short-term measures to boost profit and distributions.

Release ends

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

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