Telstra Corporation Ltd (ASX:TLS) downgraded by Standard & Poor’s

Source: Telstra presentation

On Monday the Telstra Corporation Ltd (ASX: TLS) share price saw its winning streak come to an end with a day in the red.

The telco giant’s shares gave back some of their recent gains and finished the day 1% lower at $2.84.

Why did the Telstra share price drop lower?

Telstra’s shares came under pressure on Monday after credit ratings agency Standard & Poor’s updated its view on the telecommunications company.

As you might have guessed from the share price reaction, it wasn’t a positive update. According to the release, Standard and Poor’s downgraded both its long-term and short-term rating on Telstra.

The ratings agency downgraded Telstra’s long-term rating to A- from A. Whereas the short-term rating was taken down to A-2 from A-1.

Standard & Poor’s made the move on the back of concerns over intense competition and weak profitability.

The research note states, courtesy of the ABC, that: “Competition has intensified across Telstra’s core businesses and the company has had to accept lower margins as a means of protecting its dominant market share.”

Before adding that: “The competitive environment in mobile services intensifies to the extent that Telstra’s ability to generate a meaningful premium pricing has substantially eroded.”

The ratings agency appears to also have concerns over Telstra’s aim to be a world class technology company in the future.

It isn’t all doom or gloom, though. Standard & Poor’s has kept Telstra on a stable outlook rating and is willing to look at upgrading it if the company were to adopt a more conservative financial policy and is able to “maintain consistent cash flows from its core operations”.

Should you buy on this weakness?

While I see a lot of value in Telstra’s shares after their recent decline and believe a future dividend cut has now been priced in, it is no longer the low risk investment it used to be.

But I would still choose it ahead of rivals TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC). However, to be safe I would restrict the investment to just a small part of my portfolio.

But if you're not sure about Telstra yet then this dividend share could be a great alternative. Its strong form has allowed it to increase its dividend by 27% so far this year.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications 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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