Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
Over the past year investors have clearly said yes to that question with the Telstra share price up by 38.6%.
When you think about what’s happened with Telstra shares it’s quite amazing how things have turned around for the telco’s share price even though all the numbers are going in the wrong direction. The income, the earnings before interest, tax, depreciation and amortisation (EBITDA), the net profit and dividend all went backwards in the recent report.
But, what’s bad for some shareholders with a dividend cut might actually be good for the business. I had written a number of times that Telstra’s dividend was unsustainable. Paying out all of the profit in the form of a dividend just simply won’t help long-term profit growth if it didn’t leave any funds for re-investment.
Now that Telstra has established that its dividend is not off-limits for cuts it can retain some money for investing in the business for growth.
However, management have been busy doing a few other things to boost the bottom line and improve the balance sheet by thinking about selling off non-essential assets like property whilst also cutting thousands of jobs. Neither of these initiatives are ideal, but it will help Telstra become a leaner business with the aim of being more profitable.
Telstra is facing a lot of competition in the mobile market and on the NBN from businesses like TPG Telecom Ltd (ASX: TPM) and Amaysim Australia Ltd (ASX: AYS), so its revenue line won’t grow much in the near future, but the CEO is doing his best with the things he can control.
The big question for Telstra’s future is 5G. If it turns out to be very profitable for the telco then today’s share price could prove cheap at 24x FY21’s estimated earnings – but I’m not willing to bet that the outcome of 5G will turn out differently to 4G and end up as a commodity-like service.
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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. 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.