Is this beaten-up ASX 200 share an underrated passive income opportunity?

After a fall, could this be a good investment to call on for dividends?

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Key points

  • TPG shares have fallen heavily since August 2022
  • The business is expected to grow its dividend in both FY24 and FY25
  • It’s expecting a small increase of underlying EBITDA in FY23

The TPG Telecom Ltd (ASX: TPG) share price is down around 30% since August 2022. That's a hefty decline considering telecommunications is meant to be a defensive sector. But, at this lower level, could the S&P/ASX 200 Index (ASX: XJO) share be a good passive income play?

There has been significant change in the telecommunication sector in the last few years. The shift to the NBN has hurt margins. However, there have also been some acquisitions and mergers in the sector, such as TPG merging with Vodafone Australia.

I think the change in the telco market has meant that competition is less intense, which has enabled both Telstra Group Ltd (ASX: TLS) and TPG to increase their mobile prices.

While the TPG share price has dropped, its dividend has continued to grow. But can it keep growing?

Dividend expectations

Using the estimates on Commsec, TPG is expected to maintain its dividend at 18 cents per share in FY23. That would translate into a grossed-up dividend yield of 5.3%.

Earnings and the dividend are expected to rise in FY24. TPG is expected, according to Commsec numbers, to pay an annual dividend per share of 20 cents. That would be an increase of 11%. With that possible passive income payment from the ASX 200 share, it'd be a grossed-up dividend yield of around 6%.

TPG could then increase its 2025 financial year dividend by another 5% to 21 cents per share. If the Commsec number is right, then it would translate into a grossed-up dividend yield of 6.25%.

Can earnings improve?

Analysts are certainly expecting profit to rise in FY24 and FY25.

The business could make earnings per share (EPS) of 13.7 cents, which could then rise to 17.4 cents in FY24 and 26.3 cents in FY25.

The ASX 200 share is expecting that FY23 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) will be between $1.85 billion to $1.95 billion, which excludes "material one-offs and transformation costs".

TPG noted that in 2022, the ASX 200 share recorded a net increase in mobile subscribers of 300,000, with a 6% increase in mobile customers. Average revenue per user (ARPU) for mobile was up 1.9% in the period to $32.4 per month, primarily reflecting "higher international roaming levels". The postpaid mobile ARPU was $42.7 per month, up 3.1%.

In terms of 5G, TPG says its rollout is on schedule, with more than 2,000 mobile sites completed at the time of the FY22 result. It's expecting to upgrade 1,000 new 5G mobile sites in 2023, with a similar number planned each year to 2025.

TPG and Telstra were blocked by the Australian Competition and Consumer Commission (ACCC) for their proposed network-sharing agreement, which would have boosted TPG's network coverage in regional Australia. TPG and Telstra are challenging this decision through the Australian Competition Tribunal.

The business is working on synergies between the TPG businesses and Vodafone. It reports it has achieved $140 million of cost synergies.

If TPG is to keep increasing its ARPU, that would be a natural boost for the company's earnings — if it outstrips cost increases. Such an outcome could be conducive to generating returns for investors looking for passive income.

TPG share price snapshot

As of Friday's close, the ASX 200 share was down 0.6% in 2023 to date.

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 Australia has recommended TPG Telecom. 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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