Telstra shares fell short in 2022. Can they deliver in 2023?

Last year was a period of transition for Australia's biggest telco.

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Key points

  • The Telstra share price saw a negative return in 2022, falling by around 5%
  • However, it outperformed the ASX 200 which dropped over 7%
  • The telco is expecting profit growth in FY23 (and beyond)

The Telstra Group Ltd (ASX: TLS) share price saw a negative return in 2022, falling by around 5.5%. When the dividends are added to the return, the picture looks a bit better for the telco.

However, keep in mind that Telstra's share price performance did beat the S&P/ASX 200 Index (ASX: XJO). The ASX 200 fell 7.25% over the year.

So, while Telstra shares did drop, it managed to slightly outperform the ASX index.

FY22 result revealed promise

On a guidance basis, Telstra reported that its FY22 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 8.4% to $7.3 billion, while free cash flow went up 5.9% to $4 billion. Total income was $22 billion (down 4.7%).

In FY23, the business is expecting to deliver total income of between $23 billion to $25 billion, which would represent growth. Underlying EBITDA is expected to be between $7.8 billion to $8 billion, which would be a growth of between 6.8% to 9.6%.

The above underlying EBITDA guidance includes a contribution from Digicel Pacific, which is a Pacific island-focused telco that Telstra bought during the year.

Telstra's board decided to increase the final FY22 dividend by 6.25% to 8.5 cents, which could signal that future increases are intended.

Can Telstra shares deliver in 2023?

Investors often like to judge a business by its ability to generate profit. The more profit it makes, the higher the valuation could go. The fact that Telstra is predicting underlying profit growth in FY23 is promising.

If the ASX 200 hadn't dropped by 7%, things may have been better for the Telstra share price. Higher interest rates were probably a key culprit for the decline. As billionaire Ray Dalio once said:

It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow.

Commsec numbers suggest that Telstra is going to generate 17.1 cents of earnings per share (EPS) while paying a dividend per share of 17 cents in FY23. A higher dividend (up from 16.5 cents per share) could boost investor sentiment about Telstra shares.

Plus, Telstra is on its journey of the T25 strategy which aims to cut costs, roll out 5G coverage, increase dividends and improve customer and employee satisfaction.

One of the main boosts to Telstra's earnings could be that it has announced it's going to increase mobile prices in line with CPI inflation, which could be a sizeable boost to organic revenue.

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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