Can the Telstra Corporation Ltd (ASX: TLS) share price grow to $5 during 2020?
It might not be that hard to achieve. Over the past year the Telstra share price has gone up by 21.6%. If it goes up another 21.6% this year it will reach $4.72 – nearly there! It would need to rise by 29% to get there.
But past performance is not a guarantee of future performance, particularly with individual shares. I think it’s fairly surprising that the Telstra share price has done as well as it has over the past year considering which way its earnings are going.
In FY19 Telstra’s total income fell by 3.6% to $27.8 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 21.7% to $8 billion and net profit declined 39.6% to $2.1 billion.
Does that seem like the type of performance that should cause the share price to rise? Well, Telstra’s T22 strategy is coming along well in the aim to digitise its business, improve efficiencies and lower costs. The aim is a $2.5 billion net cost reduction by FY22.
I think quite a bit of the rise for Telstra is the search for yield. Investors are nervous about investing in banks like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) because of a variety of problems. Telstra has a reputation as a dividend share, it’s not a bank, so why not?
But it’s not exactly problem-free, is it? The NBN is causing havoc for Telstra’s profit margins. Low-cost competition in the mobile space is also hurting margins, such as TPG Telecom Ltd (ASX: TPM) and Amaysim Australia Ltd (ASX: AYS).
There just doesn’t seem to be anything that will stop Telstra’s earnings falling in FY20 and that’s not great news for its prospects of being a market-beater. It’s already trading at 18x FY20’s estimated earnings with a grossed-up dividend yield of 5.9%. The dividend may seem decent, but until 5G comes along I’m not sure Telstra’s share price will go over $4 by much.
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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 owns shares of National Australia Bank 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.