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Is the Telstra Corporation Ltd (ASX:TLS) share price a buy?

The Telstra Corporation Ltd (ASX: TLS) share price has fallen by around a third over the past year to $2.73.

This fall definitely makes it worth considering whether Telstra is a buy or not.

Many investors have been buying Telstra for its dividend yield. With a 22 cents per share payout it currently has a grossed-up yield of 11.5%. Obviously this is a huge yield, but many commentators think that the dividend will fall further as it looks to re-invest for future growth. Earnings are also likely to fall in the medium-term with decreasing NBN payments and lower margins.

Telstra can’t simultaneously have a large payout ratio and also invest heavily into its business whilst maintaining its balance sheet.

It earns high margins on its key mobile business but it’s facing steep competition from competitors. Once TPG Telecom Ltd (ASX: TPM) launches its own mobile offering Telstra could face further competition.

Telstra recently announced further cost savings that it plans to make including job cuts that are mainly focused at reducing layers of management.

There are two big hopes for profit growth for Telstra.

It has an advantage in the mobile space compared to its competitors due to its mobile network infrastructure. This advantage is likely to amplify once 5G is introduced to Australia. The Internet of Things, automated cars and so on could all make Telstra’s 5G offering very valuable.

The other hope is the NBN. Obviously the NBN has been a disaster for all the large telcos across the board. A reduction of profit margins doesn’t do anyone any good. The fact that NBN Co has to make a commercial return means telcos and customers are expected to pay up. However, there is a decent chance the value of the NBN could be written-down and that means the NBN’s charges could be lower. This would be a meaningful boost to Telstra.

Foolish takeaway

I think it’s important to forget about Telstra as a dividend share. The first consideration should be the underlying business, regardless of whether it has a 1% or 10% yield.

Telstra is trading at 11x FY19’s estimated earnings. This is attractive, however until Telstra can start growing earnings sustainably I’m not interested in Telstra shares. What’s to say Telstra won’t fall further if earnings per share (EPS) keeps falling? For now, I think there are better options.

As a market-beating idea I’d much rather buy shares of this top ASX share that it showing how to grow profits strongly.

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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 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.

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