Telstra Corporation Ltd (ASX:TLS) shares are up 23% in 3 months: Too late to invest?

It certainly has been a positive three months for the Telstra Corporation Ltd (ASX: TLS) share price.

This time three months ago the telco giant’s shares were trading at a multi-year low of $2.60. Fast forward to today and they are 23% higher at $3.20.

Why are Telstra’s shares up 23% in three months?

A good portion of this gain can be attributed to the proposed merger between TPG Telecom Ltd (ASX: TPM) and Vodafone Australia.

While not everyone agrees, the general consensus is that the emergence of a third major telco company in the market will lead to less competition on prices and more focus on service.

If this proves to be the case it should mean that pricing pressures ease and margins recover. Which would be great news for Telstra and could go some way to lessening the earnings gap it faces when the NBN rollout completes.

Is it too late to invest in Telstra shares?

Considering its strong run over the last three months I think it may be a little too late to invest in the telco giant, especially when its FY 2019 dividend plans are still unknown.

My concern is that a more severe than expected dividend cut could put a lot of pressure on its shares and wipe out these recent gains.

I’m not the only one that thinks you should be cautious with Telstra. A note out of Citi today reveals that it has retained its sell rating on the company’s shares.

And while it has lifted its price target on Telstra’s shares to $2.65, this still implies potential downside of 17% excluding dividends.

The broker remains convinced that Telstra’s 22 cents per share dividend is going to be cut significantly this year and has pencilled in a 16 cents per share pay out. This forecast is based on the belief that the telco giant won’t be able to generate sufficient cash flows to maintain its current dividend. Citi then expects a further cut to 14 cents per share in FY 2020.

Instead of Telstra, the broker suggests that investors look at rival Vocus Group Ltd (ASX: VOC) for exposure to the sector. It has declared the telco company as a buy with a price target of $3.65.

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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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