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Why Telstra Corporation Ltd and its sector may face a new headache

The share price of Telstra Corporation Ltd (ASX: TLS) is heading back to lows not seen since 2011 and the lack of bargain hunters jumping on the stock is a worrying sign.

This is perhaps because the telecom sector is facing a new threat from a ticked-off Federal Communications Minister Mitch Fifield who is threatening to impose fines and compensation payments on telcos in response to a spike in consumer complaints.

Telstra took a 1.3% hit to its share price Wednesday afternoon as it slumped to $3.11 and it won’t take much for it to retest last week’s seven-year low of $3.09.

Its peer Vocus Group Ltd (ASX: VOC) isn’t faring much better with the stock falling by the same amount to $2.29 although TPG Telecom Ltd (ASX: TPM) has managed to bounce 0.6% to $5.37 as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) inched up 0.4% in late afternoon trade.

The sector is already under a dark cloud as the National Broadband Network (NBN) and rising competition are eroding profitability in the sector.

If that wasn’t bad enough, news that our telecom ombudsman had received 85,000 complains in the last six months of 2017 makes for more than just bad PR for the sector.

Furious Fifield is now threatening punitive action against the sector as he tries to end the culture of finger pointing with telcos blaming the NBN and vice versa.

“Only” a quarter of the complaints relate to cheesed off NBN customers and it’s unclear how much blame should be placed on the company running the NBN, the unimaginatively named NBN Co Limited, you can bet who the pointy end of fines and compensation will be aimed at!

After all, the government owns NBN Co and it wouldn’t work to fine itself. So, when Furious Fifield declares that he wants the culture of blame and finger pointing to stop, he really means he wants the blame to stop with the telcos, who really didn’t have a big financial incentive to bend over backwards to resolve NBN customer complaints.

The penalties the minister is threatening will change that and are also likely to introduce increased risks to the earnings of these NBN resellers mainly because it will cost these companies more to undertake customer service.

This, at a time when Telstra and friends are under intense margin and earnings pressure that threatens future dividend payments from the sector.

The sector is fast losing friends. It’s a tough time to be a telco.

The good news is that there are other high-yielding stocks with far more promising outlooks that investors can switch to.

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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 Scott Phillips.

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