I have previously been sceptical about buying shares in Telstra Corporation Ltd (ASX: TLS) and that was with good reason.
Over the last decade, Telstra has been paying close to 100% of its earnings as a dividend, which meant that the company did not have much money left over to reinvest into growth opportunities.
That’s why it’s not surprising that Telstra has not been able to grow its net profit which was $4 billion in 2009, $3.8 billion in 2017, and more or less the same in between.
Effectively, investors in Telstra have received ‘bond-like’ returns in exchange for ‘equity-like’ risk. So what makes this time different?
Why am I tempted to buy shares in Telstra?
Telstra shares appear to be undervalued. The Telstra share price has decreased by 46% since February 2015 mainly due to the roll out of the National Broadband Network (NBN), which Telstra expects to have a long-term net recurring EBITDA impact of negative $2-3 billion.
The market’s negative reaction to this was made worse after the NBN Co rejected Telstra’s plan to create an investment vehicle to securitise $5.5 billion in recurring payments it will receive as compensation for providing NBN access to Telstra infrastructure.
This should not have an impact on investors willing to play the long game and wait for those payments to be received from the NBN Co.
As a result of its share price drop, Telstra is now trading at a price to earnings ratio of 10, a dividend yield of 8.8%, with a return on equity of 29%.
The market appears to also be concerned that there might be further dividend cuts ahead. This might not be the worst thing for the company as that retained capital can be used to fund growth opportunities.
The stability and consistency of Telstra’s earnings in the past makes the valuation of its old business easier to determine. Once you factor in the impact of the NBN and expected additional competition from TPG Telecom Ltd (ASX:TPM) in the mobile space, I’m not so sure that represents a 46% loss of value as the market seems to be implying.
I’ll certainly keep monitoring Telstra and should its share price approach the $3.20 mark, I’ll be really tempted to add it to my portfolio.
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Motley Fool contributor Kevin Gandiya has no positions in any of the stocks mentioned.
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The Motley Fool Australia owns shares of Telstra Limited and TPG Telecom Limited. 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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