The downtrend in Telstra is not over yet

This post formed the basis of an article which then appeared in the Australian Financial Review on 22 February 2017. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE.

Everyone seems to have a story about Telstra’s customer service, and not all of it is positive. For investors though, and especially SMSF’s, the view is a little brighter as the big story over time has been the dividend. The stock currently yields over 8 per cent including franking. From 2010 to 2015, investors were also blessed with a share price that more than doubled in value. Since 2015 however, the share price has been on a slide. It is currently down more than 25 per cent in that time and is down about 14 per cent in the last year. Despite the large dividend, investors have effectively gone backwards in the last couple of years. As much as investors love a large dividend, this slide in the share price shows that we need to take into account the value of the capital over time.

We looked at Telstra chart in August last year and I noted the possibility of it heading under $5. At the time we were looking at whether Telstra could overlap the previous low point near $6. A failure of that would imply a dip under $5 based on Elliott Wave analysis. Recently we have seen Telstra drop to less then $5 and then rally back towards resistance near $5.30. Unfortunately it has failed at that point. Last week’s result saw the stock tumble on heavy volume. The high volume suggests a high level of conviction in that direction. The fact that there has been next to no buying in the last few days indicates a further lack of interest in the stock. We can safely say that the downtrend in Telstra which started in 2015 is not over yet. We can see some initial support near $4.50, which also happens to represent a 50 per cent retracement of the rally from 2010 to 2015. This 50 per cent level often provides strong support. For the time being, the charts indicate lower levels for Telstra.

Despite the looming dividend, investors need to take into account the potential for a capital loss, making the dividend almost redundant. We should also bear in mind that all of this is happening in a background where the sustainability of the dividend can be questioned and the market’s appetite for “bond proxies” has significantly reduced.


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