The Telstra Corporation Ltd (ASX: TLS) share price has gone up 22% over the last year. Is the telco now a solid buy?
Telstra is the largest telecommunications business in Australia, offering mobile services, home internet and various other telco services to households, organisations and governments.
Why has the Telstra share price been rising?
It has suffered in the recent volatility, just like most of the rest of the ASX share market. But it has only dropped 6% in 2022. Others have fallen much harder, like Xero Limited (ASX: XRO), which has fallen by 32%.
But Telstra has turned around its trajectory.
A few years ago, Telstra was suffering. There was intense price competition in the mobile space, which hurt Telstra’s margins. It was also suffering profit drops year after year from the shift of homes and businesses to the NBN. Telstra used to own a lot of the cable infrastructure, so it used to earn much higher margins on each customer.
But now, there are many things that are looking like positives for the Telstra share price.
The turnaround
The NBN shift has happened, so there won’t be further profit reductions because of that. Telstra can now sell wireless-powered home internet which comes with higher margins than an NBN connection.
The telco continues to win more mobile connections, increasing its utilisations. The strength of its 5G network compared to its peers means it can increase its market position.
Telstra has also been working hard on reducing its costs, which will help with margins.
In the T25 strategy it is targeting mid-single-digit underlying earnings before interest, tax, depreciation and amortisation (EBITDA) growth and high-teens underlying earnings per share (EPS) growth. Higher profit can lead to a higher Telstra share price.
I also like the move by Telstra to buy the Digicel Pacific business, which is a market leader in several countries in the Pacific region.
Higher dividends could also be on the cards?
Telstra has been paying $0.16 per share annually for the last few years. That’s probably going to be the case for at least the next couple of financial years. However, Telstra is seeking to grow the dividend once the profit growth allows. At the current Telstra share price, the dividend yield is 5.8%, including the franking credits.
Time to buy Telstra shares?
I’m not about to suggest that Telstra is the best ASX share to buy. There are others I think that are better options for dividends, and others for growth.
However, I think Telstra can provide more long-term stability than the resources businesses like Rio Tinto Limited (ASX: RIO), and produce more long-term profit growth than big four ASX banks like Australia and New Zealand Banking Group Ltd (ASX: ANZ).
