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

Who says dodos can’t fly? The biggest blue-chip dud of FY18 has taken off since posting its profit results yesterday but it hasn’t won any new friends among the brokers.

I am referring to our biggest telco Telstra Corporation Ltd (ASX: TLS) with its share price jumping around 7% since it unveiled its full year results while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) barely moved.

That’s a far cry from Telstra’s performance in the last financial year when it shed over 30% of its value. Even now it’s still down 20% over the past year, but at least things are back on the right path.

But if you thought analysts would be giving management credit, think again. Those that have been recommending investors dump the stock are sticking to their original script even as the market appears willing to give the company the benefit of the doubt.

Has the market got it wrong?

In my experience, the market seldom gets things wrong and I think the worse is over for Telstra even though the challenges remain.

Those that do not like the stock point to its relatively high FY19 consensus price-earnings multiple of 16 times with analysts forecasting a near 40% drop in Telstra’s earnings per share (EPS). That’s in line with the ASX 200 average P/E – a multiple that many don’t think Telstra deserves given its expected earnings decline over the next two years, at least.

There are also real concerns that Telstra will miss FY19 dividend expectations. While management has refused to provide a dividend guidance, the market believes dividends will drop to 18 cents a share this financial year from the 22 cents it paid in FY18.

But I think looking at P/Es is not the right way to value what is essentially a bond-proxy. It’s yield that you should be focusing on and even at current prices, I believe the market is already factoring a dividend miss for FY19.

The good news is that even if the dividend were to fall to 16 cents a share, the stock would still be sitting on a yield of around 7.5% once you factored in the franking. That’s pretty attractive even in this climate of rising global bond yields.

The fact the US 10-year government bond yield can’t muster the momentum to break above 3% makes Telstra’s dividend hard to ignore.

The next question is whether Telstra can maintain its dividend from there. Sceptics say no as an ongoing earnings decline will see the dividend drop for the next year or two, if not longer.

But I think the naysayers are underestimating the levers management can pull to stem the decline in FY20 and beyond. What’s more, Telstra is likely to look very different by then compared to what it is today.

I think a structural separation where Telstra is split into an infrastructure and a sales/marketing business is the likely outcome. This makes consensus estimates beyond FY19 an academic exercise.

There could be a nearer term catalyst for the stock too. The federal government is likely to write-down the value of the NBN and that will likely send shares in Telstra higher.

Add in the opportunities that 5G (the next generation of mobile data) brings in terms of cross-selling opportunities and further costs cutting, and Telstra may just find the earnings floor sooner than what the bears are anticipating.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. 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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