Telstra Corporation Ltd (ASX: TLS) Andy Penn says that the NBN could cause the telco to lose up to half its earnings.
In defence of Telstra's plan to cut 8,000 employees, which represents a quarter of the Telstra workforce, Andy Penn launched a robust defence of Telstra management's decisions at an event hosted by the Committee for the Economic Development of Australia about the future of work.
Telstra used to own a lot of the infrastructure that is now owned by NBN. Legendary investor Warren Buffett would be one of the first to tell you that one of the best ways to create good long-term returns is to invest in businesses with economic moats. An unmatched network of cable infrastructure was a great moat for Telstra.
However, the AFR quoted Mr Penn about the effect this was having on Australia's biggest telco "The impact of this on Telstra is profound – it means we lose between one-third and half of our earnings. You cannot take away a material part of a company's business and earnings and expect it to carry on with the same strategy and the same workforce."
Mr Penn said that of the 7,000 direct NBN employees and the NBN field force of 24,000, many of them are actually former Telstra employees.
One of Telstra's key plans to adjust to the lower revenue base is to cut costs where possible. Mr Penn also made reference to the fact that many of the new Telstra recruits may come from overseas with the telco establishing a new Telstra Innovation and Capability Centre in Bangalore, India.
Foolish takeaway
With the news of TPG Telecom Ltd's (ASX: TPM) own mobile foray being cancelled sending up the Telstra share price, Telstra shares are currently trading at 15x FY19's estimated earnings with a trailing grossed-up dividend yield of 9.9%.
If Telstra's earnings don't drop any further and price competition lessens then Telstra could be a decent pick from today's level. However, I don't think it's going to be a strong market-beater from the current price until 5G to the general public is released.
