How quickly things can change… A year ago, Telstra Corporation Ltd (ASX: TLS) shares were among the most hated stocks on the ASX (certainly amongst the blue-chips). Retail investors abandoned Australia’s flagship Telco in droves after big cuts to the company’s famous dividend – which used to be viewed as a kind of supercharged term-deposit. Telstra’s shares fell from around $6.50 in July 2015 to a record low of $2.60 in June of last year as it became apparent that the NBN was leaving a widening crater in Telstra’s earnings.
Why was the NBN so bad for Telstra?
Telstra used to operate what many would call a monopoly business. It owned the vast majority of the pre-NBN internet infrastructure (known as the copper network) from its days of being the government-owned monopoly provider of telecom services in Australia. When Telstra was privatised in the 1990s, it retained this network of infrastructure, and any competitor to Telstra actually had to lease the use of the network from Telstra before re-badging the service as their own. Naturally, this provided a huge advantage to Telstra and is the reason it was able to offer such a fat dividend for so long.
The government had always resented this arrangement (for good reason) and so when the NBN was commissioned, it forced Telstra to give up its infrastructure to the new NBN company. Telstra now operates on a level paying field with other internet providers like TPG Telecom Ltd. (ASX: TPM) – leading to much lower profit margins.
Why has the Telstra share price been on the march?
Since bottoming at $2.60 last June, Telstra’s shares have had an incredible rally. Telstra is today trading at around the $3.64 mark – a surge of 40% in just under a year (not including dividends). In my opinion, this is partly due to the market emotionally overreacting to the 50% cut in Telstra’s dividend (Telstra’s dividend was so famous that cutting it produced a venomous reaction from investors).
Telstra shares have also benefitted from the ACCC decision to block competitors TPG and Vodafone from merging and joining forces. This would have meant a more cashed-up and competitive third player in the Telco space. Whilst this decision isn’t set in stone yet (TPG and Vodafone are appealing in court), the market has definitely priced in at least some of this upside for Telstra.
Goldman Sachs yesterday upheld their $3.90 price target for Telstra – which no doubt has also contributed to the optimism surrounding the shares. If the blocked merger is upheld, and there is no significant market-consuming panics in June, in my opinion, the Telstra share price will continue to creep closer to this price target over the next few weeks.
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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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.