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Why the Telstra share price fell 8% in August

Telstra Corporation Ltd (ASX: TLS) shareholders have had an interesting month. Telstra shares started August out at $3.97 and soon after reaching a new 52-week high of $4.01 on 8 August – the first time the Telstra share price has climbed above the $4 ledge in two years. However, this was not to last. Telstra reported its earnings for the 2019 financial year on 15 August and it was all downhill from there.

What were Telstra’s earnings like?

Not the best, to put it lightly. Earnings fell more than 20% to $8 billion, while net profits fell almost 40% to $2.1 billion. The company also cut its infamous final dividend (again) to 8 cents per share, which brings it in line with the interim dividend paid earlier this year.

But the thing is, the market already knew all this was coming. It has long been common knowledge that the NBN is, and will continue to be, an albatross around Telstra’s neck. The government-run behemoth is steadily draining earnings away from Telstra’s base and this is reflected in both this years’ results as well as Telstra’s guidance for the coming year. But still, investors were disappointed that the forecasts become reality and Telstra shares responded accordingly after the earnings were released.

It didn’t get better when Telstra announced to the market yesterday that free cash flow for FY20 is now expected to be $100 million lower than what the company predicted on 15 August. A revision of this nature so close to the company’s previous guidance didn’t exactly instil investors with confidence. Telstra shares closed yesterday 2.15% lower at $3.64, and have opened slightly lower again this morning, down 0.55% to $3.62.

What’s next for Telstra?

Well, if you ask any Telstra shareholder, the thing getting everyone through the NBN pain is the promise of a 5G future. Although no one really knows what opportunities 5G will bring, many commentators are predicting NBN-beating speeds and a blooming ‘internet of things’ ecosystem. The hope for Telstra is 5G will be able to fill the hole that the NBN has bored in Telstra’s books.

Foolish Takeaway

Whilst I don’t know the ins and outs of 5G technology, I do believe that if any ASX company benefits from 5G, it will be Telstra – it remains the leading ASX telco with strong brand loyalty and a market share of around 50%. Whilst I don’t think Telstra shares are particularly cheap at current prices, I also don’t think they are expensive and might offer a good starting point if you wish to get some exposure to the telco space.

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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.

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