Has the share price of Telstra Corporation Ltd (ASX: TLS) bottomed? It’s a question many have pondered but few would dare stick their neck out to catch this falling knife. But UBS has stepped up to the plate and upgraded its recommendation on the stock to “buy” from “neutral” as it believes the risks of a dividend cut by Australia’s largest telco is already priced in but the upside from Telstra’s fight-back strategy is not. Investors shouldn’t get too excited just yet though. The good news about the upgrade could be drowned out by the latest press reports on TPG…
To keep reading, enter your email address or login below.
Has the share price of Telstra Corporation Ltd (ASX: TLS) bottomed? It’s a question many have pondered but few would dare stick their neck out to catch this falling knife.
But UBS has stepped up to the plate and upgraded its recommendation on the stock to “buy” from “neutral” as it believes the risks of a dividend cut by Australia’s largest telco is already priced in but the upside from Telstra’s fight-back strategy is not.
Investors shouldn’t get too excited just yet though. The good news about the upgrade could be drowned out by the latest press reports on TPG Telecom Ltd’s (ASX: TPM) unlimited mobile strategy, which could prove to be a game changer for the industry.
Our newest mobile network operator is planning on launching a mobile plan with unlimited data, which subscribers will get for free for the first six months before being charged $9.99 a month!
There’s no voice call function though, not till later down the track, but it’s a calculated gamble that I think will pay off. After all, no one is addicted to their mobiles because of voice calls.
TPG’s elusive but highly respected chairman David Teoh is banking on small cell technology to turn water into wine. The company believes it can make decent money from this cut throat pricing strategy because it’s cheap to roll out small cell technology compared to the traditional “macro sites” used by the incumbents.
The cheaper technology requires a lot less space to set up as it houses less equipment. This means it’s much easier for TPG to find suitable sites and that’s how the company will back its claims that it can set up a mobile network for only $600 million.
The downside is that no one quite knows how small cell sites will cope with high number of subscribers jumping onto the network. The Australian Financial Review also reports that it takes six small cell sites to replace one macro site.
What’s going TPG’s way is that it owns a great fibre network. Small cell sites require lots of fibre to work effectively.
The big price war that everyone knows is coming is at our doorstep and could dampen investors’ enthusiasm to follow UBS’ bullish lead on Telstra.
“Short-term, the June strategy day could be a positive catalyst – TLS has stated it will highlight how its $3 billion strategic capex and cost-out will allow it to be more ‘bold’,” said UBS.
“Our theory is NBN bypass, and an aggressive market share push. If we’re right, there are potentially also longer-term industry implications that are positive for TLS.”
The theory is that the move by mobile operators to offer a wireless alternative to fast broadband will force the NBN operator to cut wholesale prices. The current wholesale costs is squeezing margins of our listed telcos and is one of the biggest drivers for the sector’s de-rating and underperformance versus the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
The issue is that Telstra is facing a leaner and aggressive new competitor with less to lose and more to gain.
Even if Telstra bulls are right about its cheap valuation (and there’s certainly some merit to the argument), there’s little reason to buy the stock now.
I think it’s less risky to sit on the sidelines to see how the dust settles before making a move to back either stock.
There are certainly better dividend paying blue-chips to be backing right at the moment. The experts at the Motley Fool have picked three of their favourite blue-chip stocks for 2018 and you can find out what these stocks are for free by following the link below.
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 Brendon Lau owns shares of TPG Telecom 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.