Why is the Telstra share price down more than 6% today?
Telstra COVID-19 update: "The reality is this is an earnings downgrade, and a very disappointing one."
Telstra has today provided an update to the market around what the company will do to help stimulate the Australian economy at large during the COVID-19 pandemic. And it's clear the market has not reacted well.
Like almost everything else, the Telstra (TLS:ASX) share price has fallen in recent weeks because of the turmoil that the coronavirus pandemic has unleashed on the share market. The Telstra share price fell almost 18% from its mid-February price of $3.80 to $3.12 last week. The price has started to recover slightly this week, until falling more than 6% today.
Speaking of Telstra's COVID-19 response released today, CMC Markets chief market strategist Michael McCarthy said it wasn't a good sign for shareholders.
"This is clearly bad news. Despite the CEO trying to paint it as a bit of social welfare work the reality is this is an earnings downgrade, and a very disappointing one," he said.
What's in Telstra's COVID-19 response?
- No more job cuts or redundancies over the next six months, while still maintaining its goal to reduce costs by $2.5 billion annually by 30 June 2022.
- Telstra will hire 1,000 temporary contractors into its call centres
- Bringing forward $500 million of capital spending originally planned for next financial year into the 2020 financial year, which will speed up the roll out of 5G
- Suspending late payment fees and disconnections until the end of April to help small business and personal customers who might be struggling
- Extending all partner sponsorships for another 12 months
What does this mean for Telstra shareholders?
While Telstra's COVID-19 stimulus measures are good for the economy, it's clear that it will be at a significant cost to the business. Telstra's statement said the company would likely still meet its FY20 guidance, but warned shareholders it would be at the bottom end of the guidance.
"Earnings guidance was for growth between 0-6%, but they're now saying there will be no earnings growth despite the fact they've probably had a surge in business as more people are using their Internet services while working from home," said McCarthy.
"This could be taken by some shareholders as an admission they have very little or no room to cut costs further. And given there's another two years of their cost cutting program, that's very concerning."
"I think the market reaction has got this right. Telstra shares have been slammed, on a day when the market has been up more than 4% I think that tells you exactly what shareholders think of today's update."
Is Telstra a buy, hold or sell?
McCarthy was pretty clear with his decision on whether Telstra was a buy: "I would not be a Telstra shareholder. I just think the prospects here are far too dim."
"People are hopeful about the 5G rollout, but given how things are going with the NBN I wouldn't be optimistic about Telstra maintaining any sort of prime-mover advantages in 5G. The competitive landscape has really ramped up with the permission for the TPG and Vodaphone merger to go ahead," he said.
"I think today's announcement is just another good reason for any shareholder to consider why they're holding Telstra. It's a difficult space to be in anyway, but of all of the players today's announcement is a perfect example for me of why you would not choose Telstra."
Telstra has traditionally been a sought-after blue chip stock for Australian investors, in part because of its regular fully-franked dividend.
Telstra confirmed it will be paying its interim dividend to shareholders next week, at a total cost of $951 million. At its current share price, Telstra has a dividend yield of about 3%. This isn't ground-breaking, but at a time when the official cash rate is just 0.25% and bank deposit rates are continuing to fall, it might not be so bad for investors seeking income.
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