3 reasons UBS just upgraded the Telstra share price

Shares in the telco giant look undervalued to UBS.

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The Telstra Group Ltd (ASX: TLS) share price is defying the broader market sell-off today.

Shares in the S&P/ASX 200 Index (ASX: XJO) telco closed yesterday trading for $4.31. They're currently swapping hands for $4.345 apiece, up 0.81%.

For some context, the ASX 200 is down 0.38% at this same time.

That's today's price action for you.

Now, here's why UBS has just upgraded its outlook for the Telstra share price.

Why did UBS upgrade the ASX 200 telco?

Earlier today, UBS upgraded Telstra shares from a neutral to a buy rating.

The broker also lifted its target for the Telstra share price to $4.75. That's up from its previous price target of $4.60 per share. And it represents a 9% potential upside from today's price.

The first reason UBS delivered the upgrade is that Aussie consumers appear quite willing to pay more for their mobile plans.

According to UBS analyst Lucy Huang (courtesy of The Australian):

The 2Q23 UBS Evidence Lab Australia Telecom Operator Consumer Survey shows that, overall, consumers seem to accept price increases on mobile plans and are generally likely to absorb these increases – with net spend intentions on phone bills over the next 12 months up 13%.

The second reason UBS upgraded its outlook for the Telstra share price is the company's relative resilience.

Huang said:

Further, the survey suggests Telstra is the most resilient versus peers, gaining slight share in its main brand with decreasing churn intentions, despite increasing prices and weakening consumer.

And the third reason for today's upgrade is UBS' improved average revenue per user growth assumptions beyond the 2024 financial year in the mobile market. UBS boosted its forecast for average revenue per user growth to 2.5% based on Telstra's ability to pass on CPI-related price increases.

The broker had previously assumed long-term average revenue per user growth would be flat.

And if it's passive income you're after, UBS is forecasting Telstra shares will deliver 19.1 cents per share in fully franked dividends in FY 2024.

At the current share price, that equates to a forecast yield of 4.4%.

Telstra share price snapshot

The Telstra share price has been a strong performer over the past 12 months, gaining 12%. And that's not including the 17 cents per share in full-year dividends the telco has paid out.

Motley Fool contributor Bernd Struben 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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