It's been sad to watch the demise of shares in Telstra Corporation Ltd (ASX: TLS).
The share price has fallen 26% over the last year far under-performing the 6% rise for Vocus Group Ltd (ASX: VOC) and the 3% fall for TPG Telecom Ltd (ASX: TPM) over the same period.
Without a clear path to growth the big fund managers were quick to dump Telstra shares when the company cut its (clearly unsustainable) 100% dividend pay-out rate.
But I'm watching Telstra closely for signs of value and there are three key things I think investors should know today.
1. Competition is biting hard
Competition is great for driving innovation and investment, but it is terrible for margins and profitability. Telstra has been at pains to point out that it is operating in a 'challenging' environment and I can see no signs of that letting up.
Aggression from Vodafone and the expected fourth mobile network from TPG Telecom means the prospects of sustained price competition in the medium term are high.
2. There is life beyond dividends
Pulling back from its '100%' payout ratio will allow Telstra to take sustain in the competitive landscape, but still furnish investors.
Strategic investments means Telstra will spend up to $3bn between the 2017 and 2019 financial years to ensure internal systems are up-to scratch. However the company is committing to a revised dividend policy aiming to pay a fully-franked dividend of 70-90% of underlying earnings (defined as Net Profit after tax from continuing operations excluding net one-off nbn receipts).
On top of that Telstra is also committing to payout around 75% of "net one-off nbn receipts" to shareholders over time as fully-franked special dividends.
3. Keep your eye on mobile
Telstra is pinning a large part of its future hopes on mobile growth. The company has increased its mobile customer base consistently over the last 10 years, despite intense competition.
Part of this success will come from supporting the rapid rise of the Internet of Things. By increasing investment in narrow band, low power networks, Telstra will be enabling more and more objects to connect to the internet so your fridge can do awesome things like order beer for you.
If Testra can secure loyalty from its growing mobile customer numbers in the face of competition, I think it has a shot at protecting returns on its invested capital over the years to come. However it won't come easy and I will be watching both customer numbers and pricing closely.
