Telstra Corporation Ltd. (ASX: TLS) shareholders had a very exciting month. Shares of the telecom giant were trading at $2.74 around Christmas, but at the time of writing, Telstra has hit $3.40, a gain of over 24% since that time.
Telstra has, for the past year or two, been the stock everyone loves to hate on the ASX. Cutting its famous dividend by almost 50% alienated retail investors who just bought Telstra as a juiced-up term deposit, many at the T2 float in 1999 for over $7 a share.
I thought then that the market had acted emotionally and overreacted, and I think that the share price movements over the last few months have proved that to some extent. Although the dividend has been cut to 16 cents per share, it's likely that it has found its floor at this level and I doubt that it will be cut any further at this time. Telstra is redirecting this cashflow to invest heavily in its 5G network, which is predicted to be a huge growth driver in telecommunications over the next decade.
At current prices, this is yielding 4.4% before franking, which still makes Telstra a good income stock to own for the future in my opinion. A strong brand name and superior network coverage gives the company a significant competitive advantage, or 'moat' over its competitors (as Telstra's ads like to remind us). This is evidenced by Telstra's position as the clear market leader in the telecommunications sector – the company holds a 48% market share in mobile service subscriptions, as well as an estimated 50% market share in wholesale and commercial services.
Telstra's share price movements been heavily influenced in recent months by the attempts of telecom rivals TPG Telecom Ltd. (ASX: TPM) and Vodaphone Australia to merge their operations, which, if approved, will likely reduce competition in the market. With TPG deciding not to pursue its 5G network arrangement with Chinese company Huawei, the consensus is that the ACCC is unlikely to block this merger. This has provided additional support for the Telstra share price.
Telecom companies like Telstra are also considered a 'safe-haven' in times of economic distress as demand for their services would be relatively unaffected by a recession (I can't imagine a world where people would stop using their mobile phones and the internet).
Foolish Takeaway
In my opinion, Telstra's shares look promising – an income share with a 5G-fuelled growth upside is a solid bet. Whilst I would probably avoid adding shares to my position at these prices, I still am very bullish on Telstra's future.
