How much profit could Telstra shares make in 2023?

Is Telstra going to turn into a profit-making machine?

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Key points

  • Telstra is expecting to grow profit over the next few years
  • Currently, it could be valued at around 25x the estimated earnings for FY23
  • The business could keep growing its dividend if profit increases

Telstra Group Ltd (ASX: TLS) shares have been through a lot over the last few years. Can 2023 be a more positive year for the ASX telco share?

The company's profit suffered a big hit after the transition to the NBN. But, the business has seen ongoing performance results in its mobile division, with growth in the number of subscribers.

The Telstra share price suffered from losing the profit it made from the national network of cables it used to own.

With the NBN transition complete, there are no more profit hits coming from that headwind. The company now expects to generate profit growth over the next few years.

Let's have a look at what profit the company could generate in 2023.

FY23 expectations

I believe that the earnings per share (EPS) is one of the most relevant statistics to consider because it gives the (Telstra) share price context. It enables us to look at the price/earnings (p/e) ratio in per-share terms.

Using the earnings estimate on Commsec, the business is currently expected to generate 16.8 cents of EPS. This translates into a forward p/e ratio of 25x.

Telstra has provided its own guidance for FY23. Total income is expected to be between $23 billion to $25 billion. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $7.8 billion to $8 billion. Free cash flow after lease payments is expected to be between $2.6 billion to $3.1 billion.

It's also worth pointing out that profit is expected to accelerate to FY25, according to Commsec.

In FY25, Telstra could generate 22.3 cents of EPS, putting the Telstra share price at under 19x FY25's estimated earnings.

How will Telstra generate stronger profit?

Telstra is working on both growing its revenue and improving its profit margins.

The company announced last year that it would increase prices in line with inflation, which could give it a useful organic revenue boost from its large subscriber base.

Telstra is also working on its T25 strategy. In September 2021, it announced its intention to achieve a compound annual growth rate (CAGR) of mid-single digits for underlying EBITDA and high-teens for underlying EPS to FY25.

It's looking to reduce costs by another $500 million on top of the $2.7 billion it has already saved within the T22 strategy.

Part of that profit growth could come from its Pacific island telco acquisition – Digicel Pacific – which is a leading presence in places such as Fiji and PNG.

Plus, the board want to grow the dividend for shareholders over time. Investors have already benefited from dividend growth after a 6.25% increase to the FY22 final dividend to 8.5 cents per share.

According to Commsec, it could pay a grossed-up dividend yield of close to 6% in FY23.

My 2 cents on the Telstra share price

I think that the future looks much brighter for Telstra shares. Profit growth and dividend growth are two of the main things that will help drive the Telstra share price higher. Of the ASX blue-chip shares, I think it could be one of the better buys.

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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