Telstra Corporation Ltd just unveiled its dividend and earnings growth strategy

Credit: Telstra

The share price of Telstra Corporation Ltd (ASX: TLS) has been under intense pressure over the past year on dividend and earnings concerns, but our largest telco has just revealed how it plans to bounce back into investors’ good books.

Telstra is banking on the rollout of the next-generation 5G mobile data technology next year to help fill the earnings hole created by the entry of the NBN on fixed-line broadband and rising competitive pressure on its mobile business with the entry of Australia’s fourth mobile network operator, TPG Telecom Ltd (ASX: TPM).

The Australian Financial Review reports that Telstra is planning on running extensive 5G trials on the Gold Coast during April’s Commonwealth Games before officially offering the service to customers in 2019.

While the rollout of 5G could be quicker than what most analysts were expecting, I don’t think it’s going to be enough in this market environment to make Telstra a hot favourite for 2018 for a few reasons.

The most significant is rising global bond yields. Telstra is much more a bond proxy than a growth story as the key reason to buy the stock is for its yield.

As bond yields continue to rise this year, bond proxies will come under increasing pressure. This headwind for Telstra could persist well beyond 2018 given the outlook for interest rates.

Another key issue is the “commoditisation” of telco services. Consumers have been much more willing to pay a premium to access Telstra’s services in the past due to its more reliable and faster mobile network, but this isn’t the case anymore.

Surveys done in the sector have shown that consumers are more willing to use other better value service providers as challenger networks have upped their game considerably in recent years.

Add this to the fact that Optus is also planning on launching 5G in 2019 and I am pretty sure Vodafone isn’t far behind. The premium that Telstra used to command won’t be coming back.

Telstra needs more than 5G. The worse part is, I can’t quite see what other growth levers the group has given that it has proven to be hopeless in investing in other high-growth sectors like fintech and tele-medicine.

However, this isn’t to say that Telstra won’t come back into favour at any point. As our bull market starts to lose steam, growth stocks will fall out of favour and stocks like Telstra will suddenly be hot again. That may not happen until 2019 though, so you have plenty of time to buy the stock.

Also, Telstra’s 5G strategy will help it differentiate itself from the cheap mobile service resellers such as Vocus Group Ltd (ASX: VOC) and Amaysim Australia Ltd (ASX: AYS), who will probably not be given access to 5G networks.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited and Vocus Communications Limited (unfortunately!). The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications 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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