Where will Telstra shares be in 5 years?

After a few years of a recovery strategy, can Telstra kick on and produce earnings growth?

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Key points

  • Telstra is working on a number of initiatives to grow profit for the long-term
  • It’s starting to grow its dividend again
  • The telco sees 5G as a key part of its longer-term strategy

The Telstra Group Ltd (ASX: TLS) share price has risen by around 30% over the last two years. The telco's plans could see it rise even further in the coming years if all goes well.

2022 has been a volatile year for the telecommunications company, and most of the ASX share market. But, the Telstra share price is virtually where it was 12 months ago.

The business has been working on its T22 strategy for a few years. Now the business is working on a T25 strategy that will form a big part of the next five years, so let's look at that plan.

T25 strategy

There are several initiatives within the plan which will help Telstra's long-term performance. It includes:

  • Network coverage – Telstra wants to cover 95% of Australia's population with 5G access. The business has already invested a lot to ensure it has a leading mobile network, but it will increase its 4G and 5G network footprint by 100,000 square kilometres. By the end of FY24, 4G coverage will reach 100% of its network. At the end of FY25, 80% of all mobile traffic is expected to be on 5G. The business will achieve "greater access to towers assets with 250 new towers and 700 additional tenancies", and it has signed a regional sharing agreement with TPG Telecom Ltd (ASX: TPG).
  • Revenue growth – Adding more subscribers has always been an important part of the telco's growth strategy, and it continues to add users. But, it's also planning to increase prices in line with inflation, which could be a very handy natural boost for revenue. Plus, the business is working on growing additional businesses including Telstra Health and Telstra Energy.
  • Profit margin improvement – The biggest thing that could benefit the Telstra share price is profit growth. Telstra is planning to cut another $500 million of net fixed costs out of the business by FY25. In the next few years to FY25, the business is aiming to grow underlying earnings before interest, tax, depreciation and amortisation (EBITDA) at a compound annual growth rate (CAGR) of "mid-single" digits and grow underlying earnings per share (EPS) at a CAGR in the "high-teens".
  • Grow dividends – Shareholders have enjoyed a lot of dividend income from Telstra over the years. If it can grow its earnings and cash flow, then it can fund higher payouts to investors. In the FY22 result, it grew its final dividend from 8 cents per share to 8.5 cents per share.

My thoughts on the Telstra share price potential

I think Telstra has done a good job of turning things around. The reduction of the cost base is making it more profitable, revenue growth is looking positive and earnings diversification seems like a good move.

If it can grow underlying EPS at a good rate, then this could be a useful boost for investor sentiment, and enable Telstra to invest further in the business for more growth.

As Telstra rolls out its 5G coverage, this unlocks the potential for the company to provide fixed wireless internet for households – 5G-based broadband. This could enable the business to capture more of the profit margin for broadband customers, which has been lost to the NBN.

I think the Telstra share price and dividend look promising for the next five years, so I'd happily own it in my portfolio for the next five years and beyond.

According to CMC Markets, Telstra is valued at 21 times FY24's estimated earnings with a projected grossed-up dividend yield of 6.4%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. 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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