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Is the Telstra Corporation Ltd share price a buy?

Credit: Telstra

Telstra Corporation Ltd (ASX: TLS) shareholders can’t seem to catch a break. The Telstra share price has fallen to the lowest it has been since 2011.

Just over the past three months the share price has fallen by over 17%. Every business is worth considering if it falls by as much as Telstra has over the past few years.

Telstra is the clear leader in the telecommunications sector compared to its competitors. However, being the biggest doesn’t mean that it’s the best.

The telco has fundamentally changed over the past few years. Telstra has been going downhill ever since the NBN became a major part of Australia’s internet infrastructure. Telstra lost control of its network and now its profit margins are shrinking because it has to compete on the same terms as everyone else.

The same can be said of its mobile network. Mobile users are being offered much larger data packs for the same price. Telstra must compete with this to maintain market share and its economies of scale.

I believe that every investor needs to invest in shares that can provide growth that at least beats the inflation rate. Is Telstra going to do that? The key will be 5G. Telstra is launching 5G trials at the Commonwealth Games in the Gold Coast. 5G will be important for automated cars, connected homes, virtual reality and so much more.

But, I can’t get my head around the economics of 5G. A large chunk of households will need to sign up for 5G to make it profitable for businesses to make up for the capital costs. Can households afford to perhaps double their telco bill? What will make households want to pay for large 5G packages? 5G would need to be good enough to be able to remove the fixed internet bill of the NBN. Telstra may get a decent jump with revenue initially but then it could be stuck fighting on price for market share.

Foolish takeaway

Sadly, the best reason to buy Telstra shares is its fully franked dividend. Based on an annual 22 cents per share its grossed-up yield is currently 10.1%, which is huge. However, I think investors need to find growth along with income – I don’t think Telstra is the answer.

However, I believe this top stock is the right one for income and growth, which is why I own it in my portfolio.

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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 Scott Phillips.

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