3 reasons why Telstra Corporation Ltd shareholders should be worried

Shares in leading telecommunications company Telstra Corporation Ltd (ASX: TLS) have soared nearly 18% in the past 12 months, which has been an outstanding return for shareholders. In the process the blue-chip stock has also significantly outperformed the 8% return from the S&P/ASX 200 Index (INDEXASX: XJO).

While Telstra has certainly been a great performer in the recent past, there are reasons to be wary of its future. Here are three factors to consider…

  1. Major pay TV provider Foxtel – which is 50% owned by Telstra, with the remainder owned by News Corp (ASX: NWS) – is facing multiple new competitors. The pay-TV operator recently cut the cost of its entry-level packages and upped the content available as it faces off against online streaming services such as NetFlix. In FY2014 Telstra received distributions totalling $165 million from Foxtel, this represented growth of 6.5% on the previous year.
  2. Mid-tier telcos such as TPG Telecom Ltd (ASX: TPM) and iiNet Limited (ASX: IIN) continue to grow at rates faster than Telstra. While the telecommunications market may be expanding in size it’s also likely that these firms are nipping away at Telstra’s market share in certain areas – particularly data and ISP. Although one exception is mobile where Telstra’s offering continues its impressive grow.
  3. The total dividend has only been raised by 1.5 cents in the past nine years (from 28 cents per share (cps) to 29.5 cps). That’s much lower than other blue-chips such as Woolworths Limited (ASX: WOW) which has increased its dividend from 51 cps to 137 cps over the past nine years and significantly lower than telco peers such as iiNet which has increased its pay-out from 6.5 cps to 22 cps.

Shareholders need to watch the growth rates of Telstra’s divisions closely and the effect which increased competition is having on its business as arguably the smaller firms which are attacking Telstra’s domination could make better investments than the telco giant.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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