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Is the Telstra share price a buy after today’s drop?

The Telstra Corporation Ltd (ASX: TLS) share price is not having a good day.

Telstra shares are down 2.36% at the time of writing to $3.73 a share. Telstra shares had risen from around $3.54 on New Year’s Eve to as high as $3.89 at the start of this week.

So could today’s share price drop be a good buying opportunity for the famous telco?

Why are Telstra shares plummeting?

Well, it’s pretty obvious today’s share price moves are in response to the news that came out this morning that the proposed merger between rival telcos TPG Telecom Ltd (ASX: TPM) and Vodafone will be allowed to go ahead. The ACCC blocked the merger last year on competition concerns, but this morning it appears the Federal Court (which TPG and Vodafone had appealed to) thinks differently.

This affects Telstra as both it and the second-largest player Optus will have to contend with a far stronger and more cashed-up rival across both mobile and fixed-line services going forward.

Telstra currently has a rough 50% market share of both sectors, so clearly the market is worried that the company has the most to lose from this news.

Are Telstra shares a buy at current levels?

This decision does throw a spanner in Telstra’s works to some degree. Vodafone already had plans to build a 5G network that will be in direct competition with Telstra’s own planned roll-out – plans that will no doubt have more fire-power behind them after the merger goes ahead.

TPG also typically competes on the pricing front in the telco space, so a buffed-up market presence from TPG/Vodafone in the mobile sector is also not exactly good news for Telstra and its margins.

However, I do still think Telstra will continue to be able to leverage its strong branding and reputation of having ‘Australia’s best mobile network’. These characteristics are a ‘moat’ around Telstra’s business and I think will continue to protect it (to some degree) from competition.

Foolish takeaway

I think what will really separate the wheat from the chaff down the line is how profitable the 5G networks will be for the telcos. Although it’s difficult to assess the future impact of 5G right now, I think Telstra still stands the best chance to benefit the most when it does hit mainstream availability.

In the meantime, Telstra’s dividend (which was reaffirmed today at a semi-annual 8 cents per share) offers a juicy, fully franked 4.29% yield (6.3% grossed-up). As an income investor, I would be happy to hold Telstra shares just for that yield in today’s low interest rate environment.

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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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