Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
Telstra shares are still down 14% from the level it was at on 21 February 2020. But it hasn't actually recovered much from the date when the S&P/ASX 200 Index (ASX: XJO) hit the COVID-19 low. Since 23 March 2020, the Telstra share price is only up 4.2%.
Perhaps that underperformance now means that Telstra is comparatively good value?
Maybe Telstra's regular earnings aren't given enough credit. We all need to pay our telecommunications bill to stay connected to the internet. The last few months has shown how important the internet is for many of us to work at home, be entertained or connect with family and friends.
However, Telstra's revenue and earnings doesn't increase by 10% if we use 10% more data in a month. These days consumers get a very generous amount of data so you'd have to watch a lot of online movies in ultra-high definition to use all of your allocated data.
Telstra's share price has suffered in recent years as Australia shifted to the NBN. It was much easier for Telstra to make good profit when it owned all of the cable infrastructure. Now Telstra must compete on a level playing field with everyone else, with lower profit margins. The NBN has to recoup the money spent on it, which hurts the telco margins.
What is there to be positive about Telstra's share price?
The FY20 half-year result was actually fairly positive. Telstra's underlying earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 6.6% to $3.9 billion. However, excluding the in-year NBN headwind, underlying EBITDA increased by approximately $90 million. That's the first time this figure had grown since FY16. But then COVID-19 hit the world.
Telstra is now expecting its free cashflow and underlying EBITDA to be at the bottom range of its guidance range. Free cashflow after operative lease payments was expected to be between $3.3 billion to $3.8 billion.
Considering how low interest rates are now, I think Telstra's cashflow should be valued higher than before. Therefore the Telstra share price should be higher too, in theory. The same could be said about the dividend. The Telstra dividend should be more valuable than it was before interest rates were reduced.
I don't think Telstra will want to cut the dividend any lower than the current 8 cents per share it's paying every six months. I don't think the annual fully franked dividend will go lower than 16 cents per share in the foreseeable future. This equates to a grossed-up dividend yield of 7%. I think that's solid in today's environment.
The best reason to be positive about Telstra is the coming of 5G. The world has changed a lot since 4G was released. There will probably be new services that we can't even think of yet. Automated cars will need a high-quality connection for what they'll do. The 'Internet of Things' change is going to need a good connection to enable our devices to connect where they need to connect.
Is Telstra a buy today?
Telstra is currently trading at 21x FY22's estimated earnings. I fear that 5G could turn into a race to the bottom for telcos again like how 4G has done. There's lots of low-price competition for Telstra like Aldi Mobile, Boost Mobile and Amaysim Australia Ltd (ASX: AYS).
As investors we should want to invest in businesses that can grow over the long-term with good economic moats.
I'm not sure what Telstra's future looks like because the economics of 5G look unclear. It was companies like Facebook, Alphabet and Netflix that managed to capture a lot of the value creation by the 2010s technology changes. Will telcos be able to change that with 5G? If you think so, then perhaps Telstra is cheap today. But I'm not convinced it is a good buy.
