Telstra Corporation Ltd (ASX:TLS) investors switch off as the telco struggles at 7-year lows

Investors buy into the telecommunications sector with high hopes of big dividends, capital gains and hearty cash flows.

With such a large proportion of the global population reliant on their mobile phone devices and internet connection, what could go wrong?

It turns out, plenty.

The telecommunications sector took a beating in May 21 trade, with the S&P/ASX Telecomms (INDEXASX: XTJ) falling 14.5 points to close at 1,041 – a 52 week low after a solid 12 months of declines.

Telstra Corporation Ltd (ASX: TLS) yesterday clocked its third major outage in three weeks with millions of customers left unable to make calls or use 4G data services due to a service disruption.

Telstra shares closed at $2.80 on May 21 – a 52-week low for the stock and a drop of 37% from $4.49 at this time last year – a precarious place for Telstra to be as we edge closer to the release of 5G technology which will see competition ramp up spectacularly in the sector.

The telco giant is taking hits from many different directions at present, with the NBN roll out gobbling up market share in the broadband services space and competitors keen to knock Telstra from its long-held pedestal announcing data package offerings Telstra is forced to match, with TPG Telecom Ltd (ASX: TPM) looking to be the most gutsy peer as we head into 5G territory.

All of this equates to per customer revenue reduction which is not something Telstra can withstand and the stock is now at a seven-year low – Telstra shares are down 1.7% at the time of writing to $2.75.

Telstra CEO Andrew Penn told the JP Morgan TMT Conference earlier this month that the global telecommunications industry was in the midst of a “critical time” with competitive intensity in the Australian market increasing “substantially” as the company floundered with average revenue per unit (ARPU) down 3.6% on mobile and 2.4% on fixed in the second-half.

Telstra’s third quarter trading update on May 15 downgraded EBITDA guidance to “the bottom end of the range” with challenging conditions flagged to continue right through to FY19, but FY18 dividend of 22c per share reaffirmed.

But according to The Australian, analysts are openly questioning the assumption that the expected dividend will come to pass, with sell notices for both Telstra and TPG from several sources as brokers see unlimited as a risky way to net customers who will simply move on when the deal expires.

The Australian today reported Telstra is forecast to cut its dividend as low as 14c per share.

As Telstra flails, ambitious $4.94 billion market cap company TPG has certainly come into the game strongly, but as yet has failed to impress shareholders with its financials, as half-year results released in late March included an uninspiring EBITDA increase and conservative guidance upgrade for FY18 to between $825 million and $830 million.

Loyal telco investors may now look to the more speculative pick of telecommunications and hosting company Macquarie Telecom Group Ltd. (ASX: MAQ) – whose shares have climbed steadily in the last 12 months, up 1.6% to $19.00 at the time of writing from just $13.55 at this time last year.

The $394 million small cap probably has some pretty good growth prospects in it, but as yet, it has not asserted itself as a serious player in the telco mobile space, being more focused on hosting services for business and government.

Foolish Takeaway

Investors who have been in the telco space for years have grown accustomed to stable dividends and steady growth, but this dynamic industry is facing serious headwinds as companies struggle to keep pace with technological advances and customer expectations. While its likely such fierce competition will keep the likes of Telstra honest, it probably won’t do much for earnings growth and its days as a monopolising giant could be coming to an end fairly soon. Be wary and be prepared.

So what to do when your blue chip investment goes bad?

Check out our top tips for the top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Carin Pickworth owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom 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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!