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Is Telstra Corporation Ltd now obsolete as an investment?

Source: Telstra presentation

If you live in a home like mine with an ever-expanding range of smart phones, iPads and laptops, it will come as no surprise that in 2015 demand for data climbed by over 40% on fixed line networks while demand for mobile data grew by over 35%.

With such strong tailwinds, Telstra Corporation Ltd (ASX: TLS) shareholders should be asking themselves why Telstra’s share price has actually fallen over the last 18 months, while competitors such as TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) have continued to climb.

As investors, it is easy to become complacent. We are constantly told by investing legends such as Warren Buffett that we need to tune out from the daily noise. While doing nothing can be a great tactic for investors, it is also important to understand the opportunity cost of taking this approach.

For Telstra shareholders, the opportunity cost is the cost of not using the money to invest in other investments.

TLS obselete

Source www.google.com/finance

As we can see $10,000 invested in Telstra 18 months ago would now be worth just $9,442, while the same $10,000 investment in TPG Telecom would be worth over $18,000.

To be fair to Telstra, a major hurdle in its ability to maximise returns to shareholders and an issue investors must consider is its universal service obligation.

Commonwealth legislation requires Telstra to provide standard telephone services to all Australians. This means maintaining non-profitable parts of its network even in remote locations. Telstra’s competitors have no such obligations so they can pick and choose only the most lucrative markets to operate in.

Foolish takeaway

No doubt many Telstra shareholders justify remaining on the registry because of Telstra’s substantial dividends. While dividends are indeed wonderful things, investments need to be monitored and benchmarked from time to time to ensure they are performing as expected. In particular retired investors need to determine if current dividends are sustainable and if future dividend growth will be sufficient to meet their future needs.

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Motley Fool contributor Alan Edmunds owns shares of TPG Telecom Limited and Vocus Communications Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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