Telstra Corporation Ltd (ASX:TLS) used to be the bedrock around which most "mum and dad" investors built their share portfolios. It was a dependable blue- chip and a market darling – the dominant Australian telecommunications company in a stable oligopoly market.
And it rewarded its shareholders with consistently high dividends – plus some strong capital gains. Telstra more than doubled its share price from 2011 to 2015, at a time when the company seemed to be going from strength to strength.
But its performance since then tells a different story. The Telstra share price has plunged over the last few years, and shares in the telco are now currently trading at just $3.15. You'd have to go back as far as the beginning of 2012 to find a time when the market has priced them so low.
So what happened?
The big thorn in Telstra's side has been the NBN. Up to $3 billion in revenues from its wholesale business will be lost as customers switch from Telstra's fibre networks to the NBN. The NBN Co has agreed to make a series of one-off payments to Telstra as compensation over the next few years, but beyond that Telstra will have to find other ways of plugging the black hole in its revenues.
At the same time the industry landscape has also been changing. Intensifying competition from discount broadband and mobile providers like Vodafone, iPrimus and iiNet have threatened to erode Telstra's market dominance. But the biggest threat might come from TPG Telecom Ltd (ASX:TPM), which is building its own 4G mobile network to rival Telstra's.
So where's the silver lining?
At the moment, Telstra shares trade at a multiple of just under 10x earnings, whereas TPG trades at around 13x earnings and New Zealand telco Spark New Zealand Ltd (ASX:SPK) trades at about 15x earnings. Based on this alone Telstra shares seem cheap right now, and this could lend credence to the idea that it has been oversold.
And despite being forced to cut its dividend last year, Telstra's fully franked yield of 7% is still the highest amongst its peers. Plus, the telco has said that it will pay out 75% of those compensation payments it is due to receive from NBN Co to its shareholders. By way of comparison, TPG has been reinvesting most of its earnings into building its Australian network and expanding its operations into Singapore, so its dividend yield is less than 1%.
Foolish takeaway:
Telstra's glory days may well be behind it. A combination of the NBN rollout and increased competition from rivals has irrevocably changed the landscape of the Australian telecommunications industry.
But the market may have overreacted to the threat posed by TPG and others to Telstra's business, and shares in Australia's leading telco might well be oversold. Telstra shares may again represent good value for income investors.
