The Telstra Corporation Ltd (ASX: TLS) share price has risen by 8.2% over the past six months, is it now a buy?
Telstra’s share price has fallen by just over 50% since the start of FY16 when high yield shares were all the rage due to record low interest rates. We are still in an environment of extremely low interest rates, however those high-yield shares like Telstra and the banks are much lower due to industry-specific problems.
The big telco, along with its larger peers like TPG Telecom Ltd (ASX: TPM) face competition on all sides due to the NBN. With any small telco able to offer the same product, prices and margins have dropped.
During the GFC years investors could rely on a huge fully franked dividend hitting their bank account every year.
However, a dividend is only as reliable as the underlying earnings. Telstra’s earnings have come under fire due to both the NBN and low-cost mobile competitors offering large data bundles. There is little additional cost for a telco to offer a 1GB or 10GB package.
If a business is struggling to grow its top line, or even maintain it, then cutting costs is usually the next best thing. Telstra has an ambitious plan to save about $2.5 billion in costs which could help the bottom line.
However, there’s only so much you can do with cost cutting to grow profit. Eventually it has to come from revenue growth.
The best hope for Telstra is the introduction of 5G with automated cars and the Internet of Things. But who knows if it will be the telcos that capture most of the value-add of the services. It could be exactly like 4G where the other companies such as Google get the benefits.
Telstra is currently trading at 14x FY19’s estimated earnings with a grossed-up dividend yield of 10.4%. Until we can see how Telstra’s profit can grow with 5G I wouldn’t want to buy its shares – it may be stuck around $3 for a while.
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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. The Motley Fool Australia has recommended 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.