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Will Telstra Corporation Ltd benefit from the Internet of Things?

Credit: Telstra

Telstra Corporation Ltd (ASX: TLS) has been Australia’s biggest telecommunications business forever. This brings its own problems and opportunities.

Arguably, Telstra was the biggest loser from Australia’s switch to the NBN. It lost ownership of its market-controlling wire infrastructure and now has to compete on the same terms as every other company, even if it has its size as an advantage.

The NBN was meant to provide better internet access for Australians, but so far it’s just been an expensive change to something worse for some people.

The AFR reported that Andy Penn, Telstra CEO, said at the Consumer Electronics Show in Las Vegas “With the migration to the NBN wholesale broadband prices have increased by 100%”.

“I think the reality is that most of that increase has been absorbed by the retail service providers in the country”.

According to the AFR, the NBN Co’s corporate plan includes wholesale broadband revenues to increase by 20% to $52 a month per user between now and 2021 in order to make a commercial return.

A charge of $52 per month won’t happen in my opinion, considering a lot of providers are offering plans at $60 per month with unlimited internet to the end user. A gross margin of $8 for the telcos is simply unrealistic.

Either way, Telstra is losing out because of lower margins on the NBN. Indeed, earnings are expected to decrease fairly significantly over the next few years meaning that the reduced annual dividend of 22 cents could be in danger if Telstra sticks to its promise of only paying a sustainable dividend.

The main hope for Telstra in the future is the Internet of Things. There is a huge number of devices being connected in our homes like TVs, games consoles, fridges, security systems, climate control and more.

The key to these devices will be the connectivity they provide. The data required for these devices will need to be large and delivered extremely quickly. Mr Penn said that the revenue generated from enterprise customers is growing at 20% per year.

Telstra may have lost its moat for broadband, but it could be in pole position for 5G. It already has a clear lead with its 4G network and it could gain ground on competitors with how much it can invest into its future 5G network due to its size.

Foolish takeaway

Telstra is currently trading at 12x FY18’s estimated earnings with an expected grossed-up dividend yield of 8.46%. Although I’m not a buyer of Telstra shares, today’s price could actually be a market-beating opportunity because of how low the share price is and high the yield is.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra 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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