Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
Yesterday, the telco reported its half-year result for the six months to 31 December 2018. Telstra investors weren't impressed with the Telstra share price falling more than 2% in response.
It seemed almost certain that there would be a dividend cut, but yesterday it was confirmed. Telstra has decided to cut the half-year dividend from 11 cents per share to 8 cents per share, representing another 27% reduction.
Investors who bought Telstra shares four years ago for income have seen the value of the shares halved and the dividend reduced by nearly half as well. Ouch!
We all know the main issues facing Telstra: the NBN and mobile competition. Telstra used to own the valuable infrastructure but now it's receiving one-off payments instead, which it's paying out 75% of to shareholders – Telstra actually only declared a 5 cent ordinary dividend, the other 3 cents was the special dividend.
In the half-year report, total revenue was only down by 4.1%, but earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 16.4% and net profit after tax (NPAT) fell even harder – it was down 27.4%.
Competition is really heating up. Telstra broadband profit margins will continue to shrink unless the NBN reduces its fee to the telcos. Low-cost mobile packs from competitors like Boost, Aldi, Optus, Vodafone, TPG Telecom Ltd (ASX: TPM) and Amaysim Australia Ltd (ASX: AYS) are also shrinking the profit margins of the Telstra mobile business.
CEO Andy Penn pointed to a couple of rays of hope over the next few years "With the onset of 5G, we expect to see positive ARPU influences across the industry from uptake and new services as we have with other new Gs. We also hope there will be some improvement in nbn wholesale prices."
If the NBN Co writes down the value of its assets then that reduces the returns the NBN needs to make on assets, which could lead to lower prices. This would be great for telco profit margins and/or retail NBN prices for households.
How much extra will people be willing to pay for 5G? It remains to be seen. The current 4G network does everything I need, including streaming videos. There could be a future where households just pay for 5G to power their home Wifi, cutting out the need for the NBN. The 4G network isn't quite fast or reliable enough to stream several ultra-high-definition movies at once to a household, but 5G might be.
Foolish takeaway
Telstra is trading at 15x FY19's estimated earnings. If Telstra pays another 8 cent per share dividend at the full-year result then it has a grossed-up dividend yield of 7.3%.
If FY19 is the bottom of Telstra's earnings cycle then now could be the right time to buy its shares, but I don't think it's going to generate strong earnings growth over the next couple of years due to competition. Therefore, at best, I would only want to trade in and out of Telstra shares between now and the end of FY20 when shares go below a bit below $3.
