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Is the Telstra share price a buy?

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

Morgans thinks it is on the basis that it has grown beyond their cycle lows. At the end of June 2018 the Telstra share price hit a low of $2.62, since then it has risen 22%. So the market appears to be indicating that the worst of the Telstra news is over.

One of the main catalysts for the recovery has been a proposed merger between TPG Telecom Ltd (ASX: TPM) and Vodafone Australia. For TPG and Vodafone it makes sense because they can benefit from synergies and savings from duplicated costs by just running a single telecommunications network and business.

However, it benefits Telstra because people believe there will be less price competition if TPG is part of Vodafone. TPG has long been a leader in low-cost services and would have been a fierce competitor in the 4G and 5G space if it had gone ahead with its own network. TPG dropped the network idea due to the Huawei ban.

If TPG merges with Vodafone, the combined business will probably be more interested in growing profit margins, and not as much about just stealing market share (from Telstra).

Telstra has been under pressure on all sides from NBN competitors and low-cost mobile competitors. Telstra has had to improve its offering to customers to maintain loyalty, which is slowly reducing profit margins.

I only believe a business is worth buying if it can increase its revenue and profit for the foreseeable future. Telstra’s existing businesses is suffering, although management is doing its best to cut costs.

But the future of Telstra rests in 5G. So far all we’ve heard is that 5G phone packages will cost roughly the same as 4G, which doesn’t sound like it will improve average revenue per user (ARPU) much at all.

The future services like virtual reality, automated cars and so on will require lots of data. But, who knows how much of the benefit Telstra will get?

Foolish takeaway

Telstra’s profit and dividend fell around 27% in its recent result and is trading at 15x FY19’s estimated earnings with a grossed-up dividend yield (based on 16 cents per share annual dividend) of 7%. I think there are better priced growth opportunities than Telstra.

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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.

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