Is the Telstra Corporation Ltd share price a buy?

The Telstra Corporation Ltd (ASX: TLS) share price is currently $3.22, which is the lowest it has been since 2011, except when it dipped slightly lower over the past month.

Many investors have been drawn to the honeytrap of Telstra’s large dividend over the years. Until its latest results, it had delivered on the big income promise, although for some years it was paying out more than 100% of its profit as a dividend.

However, to get the business growing again Telstra management realised they had to reduce the dividend to less than 90% of earnings. Income-focused investors didn’t like that.

So, are Telstra shares a buy now?

Well, assuming that Telstra can grow earnings in the long-term then it could be a decent buy. However, it’s pure speculation at the moment for investors to think how the economics of 5G will work for the telcos and customers. I don’t think most people would be willing to pay a lot more for their data, even if it were transmitted to them ten times faster. Automated cars, the Internet of Things at home and various other new technologies will require data which Telstra may provide.

However, what is clear is that Telstra’s profit margin is falling due to customers switching to the NBN. Telstra used to own the network but now it’s on-selling the NBN just like every other provider. There are a lot more competitors now.

Low-cost mobile providers are also causing Telstra to offer more data for the same price.

Foolish takeaway

Telstra is currently trading at 11x FY18’s estimated earnings with a grossed-up dividend yield of 9.76%.

If we’re going to make the choice to invest in individual shares then as investors we should aim to invest in shares that are likely to beat the market. If revenue is flat and the profit is going down that isn’t likely to deliver market beating returns.

A share that is much more likely to deliver market-beating returns is this exciting business, which is growing its profit at 30% this year.

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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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