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

Credit: Telstra

The Telstra Corporation Ltd (ASX: TLS) share price is down 45% over the past three years from $5.40 to $2.96, although it has paid a total of 84 cents per share in dividends over the last three financial years in some compensation for the falling share price.

Telstra is also a very popular share among SMSF and retail investors mainly because of the perception it’s a “reliable” fully franked dividend payer. So let’s take a look at the strengths and weaknesses of the telco considering today’s share price.

Telstra’s mobile phone services business remains a market leader with a reasonable competitive advantage in that it is widely regarded as having the best network. This means many Australians are happy to pay a little extra in return for the wide network coverage in regional Australia for example.

Demonstrating the point is that in FY 2018 the group added 342,000 retail customers to its mobile business, bringing total mobile customers to 17.9 million.

However, over the year mobile revenue only increased 0.4% to $10,145 million. This is because average revenue per customer (ARPU) is actually under pressure due to the cut price deals being offered by rivals such as Optus, Vodafone, TPG Telecom Ltd (ASX: TPM), or even Amaysim Australia Ltd (ASX: AYS).

Home internet

Telstra also added 88,000 domestic retail home broadband or internet services customers over the year, and while Telstra is adding subscribers the transition to the national broadband network from Telstra’s copper network is still causing it and shareholders a lot of pain.

FY 2019 is also expected to be a “material year” in terms of the impact of the further migration to the NBN. This is a downside risk, but the upside is that Telstra is performing well in the battle for nbn market share. In total it added 770,000 nbn connections over the year, to have 1.946 million in total and an impressive 51% market share.

As a result of the loss of profits from the nbn transition Telstra has been forced to slash its dividend from 31 cents per share in FY 2017 to 22 cents per share in FY 2018.

It’s this outcome that has sent the share price tumbling. Telstra has also seen its profits on products like home phones, global roaming and text messaging disappear thanks to disruption.

For investors then much depends on the competence of Telstra’s management team to adapt to the fast-changing pace of technology to grow its own new revenue streams and spot beforehand which existing business segments may be vulnerable to disruption.

In FY 2019 the group is forecasting free cash flow of $3.1 billion to $3.6 billion, which compares to $4.9 billion in FY 2018. Whether the shares are now cheap or not then will depend on whether its management team has the competence to fight off competition and reshape, then turn around the business.

5 Companies we like better than Telstra

When ace stock picker Scott Phillips has a buy recommendation, history suggests it can pay to listen.

Scott recently revealed what he believes are the five best ASX stocks for investors to buy right now… and Telstra wasn’t one of them! That’s right — he thinks these 5 stocks are even better buys.

See the 5 stocks

Motley Fool contributor Yulia Mosaleva owns shares of TPG Telecom Limited. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.