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A new reason behind Telstra Corporation Ltd’s share price tumble

Just when you thought sentiment towards Telstra Corporation Ltd (ASX: TLS) has bottomed, news that the telco is facing $10 million in fines could not have come at a worst time with its share price hitting a more than six-year low.

The competition watchdog has served court papers to Telstra alleging that Australia’s largest telecommunications group misled 100,000 customers on charges relating to third-party apps and videos, according to the Australian Financial Review.

Telstra has pretty much admitted to the breach and will refund customers (to a tune of at least $5 million) affected by the Premium Direct Billing (PDB), where Telstra mobile subscribers are charged for third-party services through their phone bill.

Telstra supporters will think the potential fine and refund is pocket change to a company that coughed out around $1.3 billion in interim dividends alone. There isn’t much chance the telco will have to cut dividends just on this issue.

However, as big banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are finding out through the banking Royal Commission, a blow to management reputation can have a big impact on share price performance.

There are already a number of big headwinds buffeting Telstra and allegations that the telco misled customers over 2015 and 2016 even after knowing about the wrongful charges is an additional distraction for management.

The stock has been out of favour with investors in a rising interest rate environment, which reduces the appeal of its dividend yield. This has also come at a time when Telstra is cutting its dividend due to competitive pressure on earnings from the NBN and its mobile rivals such as TPG Telecom Ltd (ASX: TPM).

Sure, it isn’t only Telstra in the doghouse. TPG, Vocus Group Ltd (ASX: VOC) and Amaysim Australia Ltd (ASX: AYS) are also under intense pressure from these macro factors.

Their underperformance is plain to see with the S&P/ASX 200 Telecomms (^AXTJ) (ASX:XTJ) index crashing by nearly 28% over the past year when the broader S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up by around 1%.

However, the latest troubles to hit Telstra provides another reason for investors to stay away, despite its seemingly decent yield.

The fact is, there are stocks that can provide both a generous yield and decent profit growth (and growth is something that is elusive to Telstra).

Mining giant BHP Billiton Limited (ASX: BHP) is one that readily comes to my mind, while the expert at the Motley Fool have another that they believe is a solid income stock for 2018.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, TPG Telecom Limited, Vocus Communications Limited, and Westpac Banking. 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 Scott Phillips.

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