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Domestic growth running out for Telstra

Nearly nine months after a potential $60 million deal with South Australia’s Adam Internet, Telstra (ASX: TLS) is still unsure where the deal is headed, but the delay has highlighted a deeper issue. For Telstra, our biggest telecommunications provider, it seems the next 12 months will be crucial in setting itself good prospects for the future.

Domestically, the ACCC is coming down hard on the company’s strategy to take advantage of the rollout of the NBN and has said it will be looking into the way it conducts itself. The blocking of the Adam Internet deal is another example of how the competition watchdog is preventing Telstra from taking advantage with its market dominance.

If Telstra cannot make acquisitions within its industry successfully, it will make domestic growth difficult, especially as the company anticipates a tighter customer base in years ahead. According to the Financial Review the company will be looking to implement a two-brand strategy similar to low-cost airlines. If acquisitions cannot go through unchallenged, it may launch its own low-cost phone and internet brand.

Recently, Telstra announced it will be axing 170 jobs from its National Applications Services (NAS) business in a bid to focus on longer term growth prospects overseas, particularly in Asia. The boss of Telstra’s NAS division, David Burns, says that business has experienced growth in Asian markets and the company will look to “support our growth in Asia” with funds from the cuts.

Foolish takeaway

Telstra is well positioned to increase its customer base with the rollout of the NBN. It has consistently grown both its mobile and fixed internet customers despite increased competition from companies like iiNet (ASX: IIN) and Vodafone, owned by Hutchison Telecommunications Australia (ASX: HTA).

However, investors looking for growth matching its past two years performance could be disappointed in coming years. Telstra will need to take advantage of its market dominance domestically with takeovers or a new product line to provide growth to shareholders.

Optus, owned by Singapore Telecommunications (ASX: SGT), is already well established in Asia and has made significant purchases of smaller rivals to increase its market share and advertising revenue. Telstra’s dividend of almost 5.8% fully franked trumps SingTel’s 4.5%, but the market position of Singtel offers more growth. Nevertheless Telstra is a rock solid stock that could fit into almost any portfolio and provides safety as well as a great income stream.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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