Beware the dividend “honeypot,” Lonsec says
Shareholders burnt by Telstra’s dividend cut and spiralling share price should be wary of high yield shares with attractive dividends but shaky fundamentals, according to Lonsec Research.
Telstra recently sparked an exodus of investors after announcing a cut in its dividend from 15.5 cents per share to 11 cents, with the challenges facing Australia’s major telco suddenly made palpable to mum and dad investors, the research house said.
Lonsec said the lesson to take away from Telstra is that investors should not invest purely for income or tax advantages, that is, 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, Lonsec explained.
However, 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.
Lonsec said that while Telstra has confirmed a semi-annual dividend of 11 cents, guidance for fiscal 2019 is still vague, with the telco stating it will pay a dividend in the range of 70 to 90 per cent of underlying earnings.
While Telstra may have been an income stock darling of mum and dad investors since its final privatisation, its fundamentals came under threat in the form of competition from the National Broadband Network and other players like TPG, diminishing fixed-line revenue, and a crippling bureaucracy.
Lonsec said whether investors consider re-entering Telstra should depend on whether the telco’s “Telstra2022” strategy – which splits out the telco’s infrastructure into a separate business in an effort to reduce costs and improve customer service – can improve the telco’s long-term prospects.
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