3 reasons I'm tipping the Telstra share price to keep rising in 2023

Can investors call on Telstra to keep achieving good returns in 2023?

| More on:
A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The Telstra share price has pleasingly outperformed the ASX 200 by more than 4% this year to date
  • The telco is seeing user growth and revenue growth which, combined with improving margins, can help grow net profit
  • Telstra is expected to keep growing its dividend over the next few years

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%.

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.

More on Opinions

A young boy sits on his father's shoulders as they flex their muscles at sunrise on a beach

Where I'd invest $10,000 in ASX growth shares right now

These are my top picks for growth.

Read more »

A woman wearing a top of gold coins and large gold hoop earrings and a heavy gold bracelet stands amid a shower of gold coins with her mouth open wide and an excited look on her face.

I believe this ASX 200 stock can DOUBLE its profit in 5 years

This stock has enormous profit growth potential in my eyes, here’s why.

Read more »

Lion holding and screaming into a yellow loudspeaker on a blue background, symbolising an announcement from Liontown.

3 ASX shares that could walk away winners from the 'Future Made in Australia Act'

Life is a whole lot easier when money is being thrown your way.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Dividend Investing

With 8%+ dividends, how long can these ASX 200 passive income shares stay cheap?

I think ASX 200 investors looking for ‘cheap’ passive income shares will want to check these out.

Read more »

A smiling woman puts fuel into her car at a petrol pump.
Dividend Investing

Where I'd invest $5,000 in ASX shares now for $1,000 of dividend income

The ASX offers a rich hunting ground for dividend income.

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today

Why I'd buy this ASX 200 stock (even if we're heading for a market crash)

I am a big fan of this business, which is why I recently invested.

Read more »

A man wearing 70s clothing and a big gold chain around his neck looks a little bit unsure.

Is it a bad idea to buy ASX gold ETFs at all-time highs?

Some trains shouldn't be caught after they leave the station...

Read more »

a man with hands in pockets and a serious look on his face stares out of an office window onto a landscape of highrise office buildings in an urban landscape

Shares vs. property: What $100 invested in 1926 is worth now

AMP chief economist Dr Shane Oliver gives us the answer.

Read more »