TalkTalk will be forced to slash its dividend next year, Jefferies believes

TalkTalk will be forced to cut its dividend payout next year in order to meet its debt covenants, analysts at Jefferies estimated.

In a research note sent to clients on Monday, they reiterated their 'underperform' stance on the shares and cut their target price from 125p to 95p after evidence that the firm's new tariffs weren't delivering the hoped for reduction in 'churn'.

However, they were diluting prospects for improved earnings before interest, taxes, depreciation and amortisation and free-cash-flows.

Contributing to the above was the ongoing competition for 'value' customers in a slowing market, making it difficult to pin-point what price-point was needed in order to retain customers, the analysts said.

Furthermore, Jefferies added: "a 2Q17/18 return to on-net rev growth benefitted from the temporary tailwind of a double back-book price hike in the Aug-Sep comp. As the % of retail customers still on back-book plans diminishes, TALK's ability to punitively raise prices on them will erode. Meanwhile FLPP is still ARPU-dilutive. A year on from FLPP launch, TALK's plan is still an unconvincing experiment."

Hence, Jefferies concluded that on its below-consensus profit forecasts the firm would breach its debt covenants from fiscal year 2019/2020 if it maintained its dividend at 7.5p per share, going on to model a 40% cut to the divi next year.

That, the broker explained, was the "minimum" needed to stay within its covenants.

Jefferies's new earnings per share estimates for the firm in 2018, 2019 and 2020 were now 7.36 (previous: 8.87), 6.44 (previous: 9.79) and 7.78.