The Motley Fool

Should you sell your Telstra shares?

Telstra (ASX: TLS) shareholders have become concerned. Growing uncertainty surrounding the NBN, the Coalition government and increased competition is making investors think twice about this great Australian company.

For years, Telstra’s fixed line Public Switched Telephone Network (PSTN) used for ‘home phones’ and modems were extremely lucrative and, once constructed, cost the Telco next to nothing to offer to customers. However the adoption of smartphones and Voice over Internet Protocol (VoIP) is eradicating the plain old telephone system (POTS), meaning Telstra’s margins are coming under pressure.

In an update of its debt issuance program, Telstra highlighted the NBN as one of its biggest risks moving forward because there are so many elements that remain unknown, “the extent of the impact of a policy change resulting from a change of the Australian government at this stage is unknown.”

Telstra also warned investors of the increased competition facing it in the long run with the rollout of the NBN – whether it’s fibre to the node (FTTN) or fibre to the premises (FTTP). “The introduction of the NBN is expected to accelerate the decline in our fixed line voice revenues,” it said in its debt issuance program document.

Many investors have been bullish on Telstra’s ability to deliver long term growth, after all they’re not sitting around on their hands waiting for margins to slip away, but the company is predicting the falling revenues from its fixed line businesses will need to be buffered by some other business area.

“If we are not successful in addressing the decline in revenues from our traditional high-margin PSTN products and services and increasing the revenues and profitability of our emerging products and services, our overall performance will decline relative to that of our competitors,” the company said.

A solution?

It is true that Telstra operates in a rapidly evolving industry where competitors like iiNET (ASX: IIN), M2 Telecommunications (ASX: MTU) and TPG Telecom (ASX: TPM) are emerging threats, but it does have a number of growth areas. In its last full-year report, the number of international mobile customers grew by 12%, its NAS division recorded 17% revenue growth and it signed a number of significant contracts, including one worth $1.1 billion with defence.

Despite the regulatory uncertainty, many are content on Telstra’s prospects moving forward with the NBN. Tyndall Investment Management portfolio manager, Michael Maughan, was quoted in the Australian Financial Review as saying, “We’re going through a period of more discussion on the regulatory issues facing Telstra in the coming 12 months… but by historic standards it’s still a very benign regulatory environment.” CIMB Analyst, Ian Martin, also believes the “change in government is positive for Telstra”, according to the AFR.

Foolish takeaway

Telstra is a great, well-managed company that dominates both the mobile and fixed broadband markets in Australia. It will continue to act in the best interest of shareholders and is constantly on the lookout for new businesses and ideas to increase revenues. Its NAS and international divisions are small but have a massive market to grow into.

With a renewed focus on customer service, the telco is offering competitive packages and very reliable networks – which will greatly reduce customer attrition therefore securing revenues for shareholders in the long run.

Don’t know whether you want Telstra in your portfolio? You can get a full report on it for free! Click here for our brand-new report: “Is It Time to Sell Telstra?”

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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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