Dividend, page-45

I wonder if there is too much focus over dividends at the expense of earnings per share and return on equity. Ultimately, the share price will be driven by earnings and Telstra have already guided for lower earnings this year. Hence, I would expect that the lower guidance is already priced in.

Given that the share price has been hammered each time results have been released over the past couple of years, I would expect that management has been ultra conservative on the guidance they have given (that’s what I would do if I was in their shoes). As has already been implied in this thread, if there are any issues lurking below the surface, I would have expected that management would have given revised guidance by now. For these reasons, I am hopefull (if not confident) that Telstra will meet or exceed guidance. If this is the case then I believe the share price will increase marginally (or significantly) when the results are released.

Regarding the dividend, unless you are relying on the dividend to meet living expenses (which I know many investors do), I am not sure how material the exact dividend amount will be to the ex-dividend share price.

In an efficient market any dividend will be lost in an ex-dividend share price adjustment. There may be some benefit if you are able to utilise the franking credits (Labor’s proposed tax on retirees with SMSF’s will eliminate this benefit if they win government and get this policy through) but generally even the franking credit benefit is usually priced into the ex-dividend price adjustment. 

Of course earnings that are are not paid out as dividends will be retained and theybwill generate future earnings.

Although it has fallen over the past couple of years, Telstra’s return on equity(ROE) was around 24% last year. Assuming that the decline in earning has been arrested (that’s the big “if”) that means that they should be able to earn 20% (at least) on any retained earnings.

I am not sure about other investors, but I am not finding it that easy to generate a 20% return on my investments just at the moment so maybe it is better that Telstra retain the earnings rather than paying them out.