telstra cuts wholesale rates in dying markets, page-17

classic dividend trap The myopic focus on dividend yield continues, despite the share price fall from peak of $9 (in 1999) to current $3.63.

TLS has just paid 120% dividend payout ratio of earnings to prevent the share price from collapsing.

Any company that thinks it can continue doing this for a few years is delusional.

Raised bank borrowings to do this (second year in a row). Credit rating fell, leading to higher interest rate.

Banks get increasing interest payments.

Bank loans have to be repaid out of future earnings, meaning EPS will fall, other things being equal. Basic Corporate Finance 101.

Underlying gearing risk of TLS has been rising. Equity premium for rising risk means lower P/E ratio, meaning fall in share price, even if EPS does not fall. Fall in EPS accelerates the share price fall.

This has already been happening, over the past year.