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Why I wouldn’t invest in Telstra Corporation Ltd (ASX:TLS) for years

Credit: Telstra

The Telstra Corporation Ltd (ASX: TLS) share price has hit another multi-year low this week and is currently languishing at $2.87.

Since 2015 we have seen the share price fall from above $6, to $5, to $4, to $3 and now it’s in the $2s. At each level some people may have seen it as a decent value choice and would make for a good income choice.

A big dividend isn’t much use if the share price then falls by more than the dividend.

Any investment needs to be based on the future of the business. Telstra is facing a variety of issues. The NBN is slashing Telstra’s profit margin on broadband services. Large competitors are now unveiling ‘unlimited’ data packages, forcing Telstra to do the same. Around the corner, TPG Telecom Ltd (ASX: TPM) could soon unveil Aldi-like prices for its own mobile network.

The average revenue per customer is dropping. In the past, telcos used to be able to charge per phone call, per text and per gigabyte, whereas now the offerings are unlimited. You can’t really charge more for unlimited services.

The best companies on the stock exchange have excellent pricing power, they decide the prices they can charge and regularly increase – Telstra is having to react to the intense competition by decreasing prices.

If I invest into a stock for income, I only do so when I can see the earnings has good potential for growing over the medium-term and long-term, that’s what supports a sustainable dividend. Telstra’s dividend can’t grow if the earnings can’t grow. Indeed, the dividend can’t be maintained if the earnings aren’t maintained.

The share price will only turn around if Telstra can show that its earnings will grow in the future. In the long-term perhaps automated cars and the Internet of Things in our homes could turn things around. But, who knows when that will happen? And how much of that technology-added value will the telco manage to capture if it’s treated like a commodity.

Foolish takeaway

Telstra may be able to turn itself around when future data devices are connected. But we don’t know the economics of that, or when it will happen. It would be a gamble to invest at this point thinking Telstra’s fortunes will turn right around, even if it is trading at around 10x FY18’s estimated earnings.

If you want growing income, I’d much rather invest in this exciting stock which just grew its dividend by more than 25%.

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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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