The Telstra Corporation Ltd (ASX: TLS) share price has been on a downward trajectory over the last five years.
The arrival of the NBN levelled the playing field in the telco sector and ended its monopoly on fixed line services. This created a significant gap in its earnings and led to a series of dividend cuts.
Unsurprisingly, this has also led to the telco giant's shares losing approximately 50% of their value over the period.
However, I believe things could be a lot better for the company over the next five years and now could be a good time to consider an investment.
To demonstrate why, here are four reasons I would buy Telstra's shares:
1. Defensive qualities.
Only a handful of companies have been able to maintain their guidance for FY 2020 during the coronavirus crisis. Telstra is one of these companies and recently reiterated that it was on track to hit its guidance despite the coronavirus outbreak and its initiatives to support the economy during these tough times. The latter includes postponing job reductions, hiring temporary new staff, and bringing forward $500 million of capital expenditures. I believe this demonstrates Telstra's defensive qualities and why it can be a good share to own during uncertain times.
2. NBN rollout is nearing completion.
The biggest drag on the company's performance over the last five years has been the rollout of the NBN. The loss of its fixed line revenues has created a major gap in its earnings and has been compounded by weak NBN margins. This could be seen in its recent half year results. Telstra reported a 6.6% decline in underlying EBITDA to $3.9 billion for the half. However, underlying EBITDA excluding the in-year NBN headwind grew by approximately $90 million. This was the first time this figure has grown since FY 2016. The good news is that the NBN rollout is now nearing completion and it won't be long until this headwind is gone forever. This could mean a return to growth is possible in the coming years.
3. Generous dividend yield.
As I mentioned above, Telstra is on course to achieve its free cash flow guidance in FY 2020. As a result, I believe it is well-placed to maintain its fully franked 16 cents per share dividend. Based on its last close price, this dividend equates to a 5% yield. I think this is a very attractive yield for income investors in this low interest environment. Especially given how many economists expect the cash rate to be staying at ultra low levels for a long time to come.
4. Attractive valuation.
I estimate that Telstra's shares are currently changing hands at under 18x FY 2020 earnings. As a comparison, rival TPG Telecom Ltd (ASX: TPM) is trading at an estimated 25x forward earnings. I think Telstra's shares deserve to trade on a higher multiple considering its improving outlook (due partly to the highly successful T22 strategy), the return of rational competition, and its defensive qualities. And once the market volatility settles, I wouldn't be surprised to see its shares re-rate higher for those reasons.
Overall, I feel this makes it a share to consider snapping up today with a patient and long-term approach.
