The Telstra Group Ltd (ASX: TLS) share price has risen by around 9% in 2023 to date, beating the S&P/ASX 200 Index (ASX: XJO) return which has seen a 4.5% gain. I'm going to explain why I'm optimistic about this ASX telco share.
It has been a volatile few years for the ASX share market as the COVID-19 pandemic, inflation, and interest rate increases impacted market sentiment.
The last eight or so years have been tricky for the telco sector as it adjusted to the NBN providing internet infrastructure, leading to lower margins. We can see on the chart below how far the Telstra share price has dropped since 2015. But it's recovering, and I think it's going to keep recovering.
Revenue growth
One of the most important drivers of profit growth is usually revenue growth.
Cost cutting can help increase margins, but there's only so much that costs can be reduced before it starts harming the long-term performance of the business. For example, cutting customer service expenses wouldn't be smart for customer loyalty, while reducing marketing might hurt future growth.
Telstra is demonstrating revenue growth in a number of different ways with growing subscriber numbers and rising subscription prices. In turn, this is helping increase the average revenue per user (ARPU).
In the FY23 half-year result, Telstra reported its mobile division saw postpaid services increase by 68,000, while prepaid unique users increased by 137,000. The postpaid ARPU improved by 4.5%. These are useful tailwinds for the Telstra share price.
I think revenue could continue to grow with the return of international roaming, further subscriber growth, and price increases. As well, Australia's population continues to grow so this could be a natural boost for the company's potential revenue,
Profit margin growth expected
Telcos can be fairly scalable businesses. Once the network infrastructure has been created, additional users can be a boost for profitability because there's not much additional cost to service those users. As I've already mentioned, Telstra is seeing ongoing user growth.
As part of the company's T25 strategy, it's trying to increase profit faster than revenue. The FY23 first-half result saw the company delivering on this goal. Total income went up 6.4% to $11.6 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 11.4% to $3.9 billion, net profit after tax (NPAT) grew by 25.7%, and earnings per share (EPS) rose 27.1%.
Investors often like to focus on profit to decide how to value the Telstra share price. The ASX telco share's profit could keep rising thanks to a combination of rising revenue and improving profit margins as it keeps costs under control. It's trying to remove $500 million of costs by FY25.
I'm not sure how many other ASX blue chip shares are likely to grow profit in FY24 and FY25 – resource prices are unpredictable while banking lending is facing a lot of competition.
Bigger dividends
Some investors are particularly attracted to higher shareholder payouts, which could provide further support for the Telstra share price and boost the cash returns of the company. Higher profits could fund bigger dividends.
In the FY23 first-half result, Telstra grew its interim dividend by 6.3%. Commsec numbers suggest that Telstra could pay a full-year dividend of 17 cents per share – this would be a grossed-up dividend yield of 5.6%.
By FY25, the business could be paying an annual dividend per share of 19 cents per share, which would be a grossed-up dividend yield of 6.3%.
