Telstra Corporation Ltd (ASX: TLS) is undoubtedly the most hotly watched stock in the ASX telco space.
There is plenty of negativity surrounding the telco stalwart, particularly from shareholders who have been burned by its plummeting share price over the last few years, not to mention unhappy customers who have been frustrated by poor service from offshore call centres for the better part of the decade – don’t forget these unhappy customers are often shareholders too.
But no matter which way you cut it, Telstra’s network advantage will be hard to beat, and despite the volatile future of the sector with the imminent advent of 5G technology, I think there’s a good chance Telstra will remain the dominant player for the foreseeable future.
It’s already number one
Telstra already holds the position of number one telecommunications company.
Sure, there is speculation it will be knocked from its pedestal by the likes of TPG Telecom Ltd (ASX: TPM), but I honestly think this is unlikely.
Telstra has come up against some hard times of late but it’s never stopped investing to maintain its network, and its network alone offers up a pretty big advantage.
While there could be some chances for TPG to snatch market share in the upcoming 5G war, Telstra has an undeniable advantage, and its customer loyalty and brand preference also counts.
While many network users across Australia love to hate Telstra, they are also reluctant to move away from its offerings and this is unlikely to change overnight.
Yes, NBN could be an issue with transferring customers, but the full impact of that is uncertain for now, although it could complicate things when the 5G spectrum auction comes up in November.
TPG and Vodafone Hutchinson Australia merger
Telstra shares rallied in mid-August – hitting a five-month high off the back of news of merger talks between TPG and Vodafone Hutchinson Australia.
TPG and Vodafone confirmed they had agreed a deal in relation to a potential combination of “two highly-complementary companies” although it has been underlined there is no certainty the ACCC will approve a deal.
So what does this mean for Telstra?
A merger between TPG and Vodafone would likely see an end to aggressive discounting practices, and this will be music to Telstra’s ears – and its margins.
If you take price constraints out of the picture, Telstra might be able to come closer to dividend expectations in the coming years – and this would certainly sway the sentiment of some investors in the right direction for Telstra, or at least convince some wannabe sellers to continue to hold.
Brokers’ views are mixed
Some brokers have slapped sell ratings on Telstra of late, with Citigroup being one to remind investors to act cautiously and sell during any rally while other brokers have maintained holds on the stock.
But it pays to consider the viewpoint of brokers across the entire industry, with Citigroup itself concerned investors are too excited by the possible TPG merger – forgetting to consider the company still has very high levels of debt and is yet to prove itself other than to whip up some hype about mobile plan price cuts.
While Telstra has the existent customer base, experience and size to give it more capacity to cushion the impact of mobile earnings declines.
There is no doubt the industry is in for a shake up, but I highly doubt Telstra will accept being knocked off the ledge without a serious fight.
Meanwhile, Vocus Group Ltd (ASX: VOC) is desperately trying to assert itself in the space, but it has a long road ahead to gain customer and investor trust alike.
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Motley Fool contributor Carin Pickworth owns shares of Telstra Limited. 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.