Why did the Telstra share price outperform the market in May?

Telstra was a relatively good investment in May. But why?

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The Telstra Group Ltd (ASX: TLS) share price had a relatively positive month in May.

Although the telco giant's shares ended the period a single cent lower than where they started it at $4.36, this was significantly better than the market average.

For example, over the course of May, the S&P/ASX 200 Index (ASX: XJO) lost a disappointing 3% of its value.

Why did the Telstra share price avoid the market selloff?

There were a couple of reasons why the Telstra share price outperformed the market in May.

The first is the company's defensive qualities. These are very attractive in the current environment and appear to have helped the company's shares hold up better than most during recent market volatility.

Another catalyst was news of mobile price increases from Telstra and its rivals Optus and Vodafone, which appears supportive of both rational competition and earnings growth in the coming years.

Goldman Sachs responded positively to the news. It said:

Telstra has announced that postpaid mobile plans will be increasing in price by $3-6/m from July-23, in-line with inflation & our recent expectations. Although not impacting our earnings forecasts, today's announcement: (1) Reinforces our confidence in our +5.6% EBITDA growth in FY24E, which is driven by Telstra mobile division (=99% of our EBITDA growth); (2) Is evidence of Telstra continuing to be a rational incumbent, leading mobile market pricing higher, and signaling to competitors it remains focused on improving industry returns; and (3) Increases the likelihood that Telstra will fully utilize CPI within its 2024 plan revision – with our +3.1% inflation forecast in the Mar-24 qtr implying a $2/m increase.

In respect to Optus, the broker adds:

[G]iven: (1) the focus on improving returns; (2) the quantum of increases from Vodafone (c.$5) and Telstra ($3-6) this year; and (3) recent increases to entry level TLS MVNO pricing, which had been a key issue for Optus (Aldi increasing entry level plan +$2 to $17/m, Boost planned Jul-23 increases, Woolworths recently removing its $10 prepaid plan, Belong raising pricing) we believe Optus will likely follow Telstra's recent changes in the coming months, which would be positive for TLS/TPG.

Can Telstra shares keep rising?

The good news is that Goldman Sachs still sees value in the Telstra share price. It has a buy rating and $4.70 price target on its shares, which implies potential upside of almost 8% over the next 12 months.

In addition, the broker is expecting fully franked dividends of 17 cents per share in FY 2023 and an 18 cents per share in FY 2024. This is the equivalent of approximately 4% yields at current prices.

Motley Fool contributor James Mickleboro 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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