Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
That's a good question. Since 21 February 2020 the Telstra share price has fallen by 17%. It hasn't fallen as much as the market – the S&P/ASX 200 Index (ASX: XJO) has 29% dropped over the same period. The ASX 200 had fallen even further but it has recovered a bit over the past couple of weeks.
How much will the telco hurt during this coronavirus period?
I think that's the most important fundamental question of this period. If a business' earnings are going to smashed during this period then a large share price fall is mostly justified.
As a telco you'd think that its earnings will hold up better than most.
Everyone is (meant to be) spending time indoors. Most households will view their phone and NBN internet as important sources of entertainment for this period.
However, there are a number of things that may cause Telstra's earnings to fall. If businesses are temporarily shut they may not (be able to) pay their Telstra bill. Not many people are going to be buying a new phone if they're relying on government support. Telstra has been kind enough to give people more data during this time, so they won't need to upgrade their plan. I don't think Telstra is quite as defensive as some people think.
Telstra has already announced a number of initiatives to respond to the pandemic such as putting on hold job reductions, bringing forward capital expenditure to accelerate the 5G rollout and suspending late payment fees & disconnections until at least the end of April.
It has also said it's expecting its FY20 result to come in at the bottom end of the range for free cash flow and underlying earnings before interest, tax, depreciation and amortisation (EBITDA).
Foolish takeaway
There's a chance that Telstra's dividend may be reduced in FY20, so don't count on the telco for a big dividend. I think we need to look ahead to FY22 for the first normal year. Telstra is trading at 20x FY22's estimated earnings. I'd much rather buy a business like Altium Limited (ASX: ALU) which has been sold off harder than Telstra, but has better long-term growth prospects.