For the second time in a month, investors were hanging up on Talktalk Telecom Group PLC (LON:TALK) after another broker suggested a dividend cut might be necessary in the near future.
Back in November, Citi’s Simon Weedon said the telecoms group’s debt covenants could force it to rethink its dividend policy, something Jefferies analyst Jerry Dellis agrees with.
READ: Citi reckons Talktalk will have to cut its dividend again to stop it from breaching debt covenants
TalkTalk has already been forced to trim its payout once in 2017, halving last year’s final divi back in May on the back of a weak set of full-year results.
40% cut the ‘minimum necessary’
At that time, the firm also said it would chop this year’s total dividend to 7.5p, although Dellis reckons this will have to be cut again if TalkTalk wants to avoid breaching its debt covenants.
"On our forecasts, TalkTalk will breach its bond covenants from FY18/19 if the current 7.50p dividend is sustained,” wrote Dellis on Monday.
“We model a 40% dividend per share cut to 4.50p next year. This is the minimum cut necessary to adhere to debt covenants, if results develop in-line with our (below consensus) forecasts.”
Dellis added that the company should probably play it a bit more safely and cut its divi even more, although he concedes that “TalkTalk is unlikely to chart a conservative course on dividend policy”.
TalkTalk ‘to miss EBITDA guidance’
Aside from the dividend concerns, Dellis also points out that the Fixed Low Price Plans introduced this time last year are failing to reduce churn rates, while he expects TalkTalk to miss its EBITDA guidance this year, given its recent past.
“At last year’s interim results, TalkTalk guided to FY16/17 at the low-end of a £320-360mln and then delivered £304mln.”
The analyst kept his ‘underperform’ rating in place, but slashed his price target to 95p (from 125p previously).
Shares fell 5.2% to 146.5p on Monday morning.