Telstra Corporation Ltd (ASX: TLS) holds an enviable market-leading position as the entrenched telecommunications provider to millions of Australian households and businesses.
While the benefit of its history doesn't make the company immune from competitors like TPG Telecom Ltd (ASX: TPM), its legacy customer base is definitely an advantageous position to be in.
So why don't I find Telstra a compelling investment case you may ask?
A review of the group's recent full year results will shed some light…
If we work our way down through the profit and loss statement, revenue (on a reported basis) increased by just 1.9% to $25.8 billion. This lacklustre growth highlights the difficulty a giant such as Telstra faces in sustaining growth off an already huge base.
Moving to the profit line and Telstra reported a fall in net profit after tax (from continuing operations) of 6.9%. This decline corresponded to a fall from $4.1 billion to $3.8 billion with the NBN providing a negative recurring impact of $145 million to earnings before interest, tax, depreciation and amortisation (EBITDA).
Thanks to share buy-backs the impact to earnings per share (EPS) was lessened to a decline of "only" 5.7%.
Telstra's dividend is of course a key focus for many shareholders and on this score there was some good news with the full year dividend increased by 1.6% to 31 cents per share (cps).
This payment equates however to a 98% pay-out ratio which leaves essentially no headroom for further increases without earnings growth.
More critically, it leaves little room to maintain the 31 cps dividend payment should earnings fall!
The declining profitability of Telstra is having a notable effect on some key operating metrics too.
Return on equity (ROE) and return on invested capital (ROIC) declined by 3.8% and 2.1% respectively. Admittedly, Telstra still generates above average returns – ROE was 25.7% and ROIC was 13.6% – however in my opinion the quality of Telstra's business operations appears to be declining.
Not all bad news
Despite the above negatives there were some positive takeaways from Telstra's full year results.
These positives included a strengthened balance sheet with net debt successfully reduced by over $1 billion and gearing lowered to 44%.
Another highlight was the stand out performance of the global connectivity division which experienced an increase in EBITDA of $124 million to $265 million, equating to a growth rate of 88%.
Outlook
Management provided FY 2017 guidance for mid-to-high-single digit growth in revenue and low-to-mid-single digit growth in EBITDA.
Before investors get too excited by those forecasts however, management also flagged an increase in capital expenditure which will presumably weigh on the growth in profits and EPS.
With Telstra's shares trading on a trailing price-to-earnings multiple of 16.6 times and a fully franked yield of 5.9%, the stock looks fairly priced to me and lacks a compelling investment case.
