The Telstra Corporation Ltd (ASX: TLS) share price could be a buy again after many years of hurting.
For years I haven’t been a fan of Telstra because of its profit declines, the NBN switch over and strong competition in the mobile space.
But things are starting to look up for Telstra shareholders.
A return to profit
Telstra recently said at its T25 strategy day that it is expecting mid-single digit underlying EBITDA (EBITDA explained) growth and high teen underlying profit/earnings per share (EPS) growth.
Profit growth has been missing from Telstra’s results for a number of years. The fact that it’s now expecting growth again is a positive sign.
Using the latest Telstra share price and CommSec estimates, the telco is valued at 24 times the estimated earnings for the 2023 financial year.
Further cost reductions
Revenue growth isn’t likely to be strong for Telstra.
But it has a plan to reduce costs by another $500 million to 2025. It’s a good sign that Telstra can continue to lower its cost base. Higher profit margins are what is most likely to help send the Telstra share price higher.
I also believe there is a big opportunity for Telstra to change household broadband connections from the NBN to a wireless 5G connection, this would significantly increase the profit margin generated on that household.
Earnings diversification
Telstra is a huge telco. But it could be a risky move to stay just operating purely as a telecommunications business forever.
The ASX blue chip share has been making moves to diversify its earnings for the long-term and open up new growth avenues.
For example, it recently announced the acquisition of MedicalDirector for a value of $350 million. This business is a clinical and practice management solution that supports GPs and other medical specialists to focus on providing high quality care and reducing time on paperwork and administration. It offers this solution as a software as a service (SaaS) model. MedicalDirector currently supports 23,000 medical practitioners and is used to deliver more than 80 million consultations a year.
Telstra Health has a vision of being a leading partner to the health and aged care sectors.
Growing dividends?
Telstra also said that as part of its T25 strategy it would like to get back to growing its dividend it can, when profit and franking credits allow.
Considering a lot of investors look at Telstra for the dividend, a growing dividend would be a really good change. At the latest Telstra share price, with its $0.16 per share annual dividend, it has a fully franked dividend yield of 4.1%.
Telstra seems to have turned a corner. Out of the ASX 20, it’d be one that I’d consider. However, I still believe there are plenty of ASX dividend shares with more growth potential.
