Is the Telstra Corporation Ltd (ASX: TLS) share price a buy today?
Telstra is Australia’s largest and oldest telecommunications business, having built the first telegraph line in 1854. Today, it provides more than 17 million retail mobile services, nearly 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services.
Telstra also has operations stretching across eHealth, network applications and subsea cabling. Starting in 1997 (until 2006), the Australian Government sold Telstra to Australian investors via the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.
Is the Telstra share price a buy?
The Telstra share price has fallen by around 22% during 2018. Some investors might say that Telstra is 22% better value, but that may not be recognising the deterioration of telco industry conditions.
Competition is fierce in the mobile industry. Low-cost operators like Boost Mobile, Aldi, Amaysim Australia Ltd (ASX: AYS) and TPG Telecom Ltd (ASX: TPM) are driving down prices whilst also increasing the data allowances. Telstra’s large competitors, Optus and Vodafone, have also been increasing their competitiveness.
Telstra is responding to the competition, my own Telstra mobile package just more than doubled the data allowance for the same price. It’s more competitive, but people can pay less to get the same data.
The introduction of the NBN has messed with Telstra’s broadband margins. With the cables now in NBN Co’s hands, Telstra earns a much smaller margin and has a lot more competition.
Investors who were attracted to the dividend have been disappointed too – the annual dividend was decreased from 31 cents per share to 22 cents per share. Falling profits may mean further dividend reductions are necessary if it is to continue with its sustainable dividend payout ratio policy.
Overall, the current situation doesn’t paint a great picture.
3 reasons the Telstra share price could be a buy:
- Reduced competition: If the merger between TPG Telecom and Vodafone Australia goes ahead then mobile pricing competition may reduce, leading to higher profits for Telstra. That’s if the deal gets through the ACCC.
- 5G: The introduction of 4G to Australians saw data demand rise rapidly, causing people to pay more for their mobile plans. Telstra management are hoping for the same thing with 5G with new technology like automated cars and the Internet of Things. A consumer 5G plan could steal some of the NBN’s thunder (and revenue) if it’s faster and more reliable.
- Cheap: If Telstra’s earnings don’t fall much further then investors calling Telstra cheap today could be getting a bargain buy. Telstra is trading at just under 10x FY18’s earnings with a trailing fully franked yield of 7.7%.
Only time will tell whether Telstra turns out to be a strong investment from here. Investors who have held since the government sales haven’t fared well compared to the overall market returns. That’s why it might be a better idea to go for shares with proven profit growth track records like the ones in the free report below.
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