How Safe Are Dividends Of Australia’s Top Payers

Telstra Corporation Ltd (ASX:TLS)

The telecommunication giant tops the list with a dividend yield of 6.45%. The company has a steady track record over the past 10 years; however, dividend grew just 10% in that time period. Risks to its dividends have started to emerge with earnings dropping 9.6% over the past year.

Telstra reported mid-single digit declines in earnings and revenue for the half-year to 31 December 2016. The new growth platform, Network Applications and Services, currently appears insufficient to make-up for the prospective loss of $2–$3 billion in EBITDA following the national broadband rollout.

Increased competition and change in regulations that  reduced the MTAS and FAD fees charged to rivals have further pressured its core business. With Telstra set to pour in $3 billion in capex to upgrade its network infrastructure and digitization, its dividends can be in danger if earnings don’t rebound soon, which seems unlikely based on current market dynamics.

“Data volumes have increased and intense competition on pricing across fixed, bundles, mobile, data and IP has had an impact”, said CEO Andrew Penn in a statement.

National Australia Bank Ltd. (ASX:NAB)

Increased competition amid low interest rates has not been able to completely overshadow the strong growth in lending in Australia and New Zealand – while cash earnings dropped 1% in the most recent quarter, also affected by the Enterprise Bargaining Agreement, revenue grew 1%.

Although NAB had a Tier 1 capital ratio of 9.5% on December 31, higher than its target of 8.75%–9.25%. Expecting a further increase in capital requirements by regulators, NAB hinted towards issuing tier-2 capital security to enhance its capital position.

NAB’s current dividends of 6.2% may not make sense if the company has to raise capital to sustain the dividends. Thus, it may make a hard, but prudent, choice like ANZ, which cut dividends after a double-digit decline in profits.

A positive scenario that can improve NAB’s capability to sustain dividends would be an improvement in interest rate margin and continued strength in domestic markets, where it has been channeling its resources after deciding to divest non-core assets in the UK and the US and trimming down its wealth division.

With multiple headwinds, both TLS and NAB aren’t as solid dividend payers anymore as they used to be over the past 10 years. While long-term shareholders choosing to stick with their investments isn’t a bad idea given the companies’ industry leading positions (TLS – telecommunications and NAB – business lending), limited dividend growth potential due to high payout ratios and rich valuations amid competition pressuring margins could keep new investors at bay.

Looking for how the fundamentals of other top payers are playing out, here’s a list: Australia’s Top Payers