Today the S&P/ASX 200 Index (ASX: XJO) is down over 6% at the time of writing, but the Telstra share price is only down by 4%. That means it has fallen less than the overall market.
What to think about Telstra during this market crash
As the case with any business, you have to consider whether the price being offered is good value for the fundamentals.
Some businesses will genuinely see a large short-term hit to their earnings because of this outbreak. Shares like Sydney Airport Holdings Pty Ltd (ASX: SYD) and Auckland International Airport Limited (ASX: AIA) have already seen large passenger falls, which will mean lower earnings.
But Telstra is a little different. It’s a utility business. I’m going to keep using the internet during this period, so I need to keep paying my Telstra bill. Having internet access will be a priority for most people.
So for me, I think Telstra’s earnings will fall a lot less than travel companies in FY20. Telstra do better than retail stores and banks too. Retail stores could see a fall in foot traffic and banks could suffer rising bad debts.
Telstra’s earnings are well placed to be relatively stable, particularly as it’s currently trying to lower costs.
Indeed, with 5G coming along we may see a much higher demand for digital services over the medium-term.
What about the Telstra dividend?
I’ve always said that a dividend is only as stable as the earnings (and profit reserve). If Telstra’s earnings can avoid most of the pain then it’s feasible that the dividend can be largely maintained even if there’s a recession.
If Telstra pays a 16 cents per share dividend over the next 12 months then it currently offers a grossed-up dividend yield of 7.6%.
Telstra is now trading at 18x FY22’s estimated earnings. It’s not cheap compared to some other shares, but if you’ve been waiting for an opportunity to buy shares then this could be a good time to buy. However, there’s no guarantee this is the lowest point of the outbreak yet.
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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 Sydney Airport Holdings Limited and 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.