Is the Telstra share price a bargain buy at $4?

Is it time to call on this telco to try to make us returns?

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The Telstra Group Ltd (ASX: TLS) share price has been drifting lower over the last few months. Since 21 June 2023, the company has gone down by close to 10%, as we can see on the chart below. Some investors may be looking at the business and thinking that it could be appealing.

Telstra is the largest telecommunications business in Australia, with an impressive market share of mobile and a strong position in home broadband. It also has operations in other areas, such as Telstra Health and Pacific telco business Digicel Pacific.

First, I'm going to look at whether it's a bargain, and then consider if it's a buy.

Telstra share price valuation

There are a number of different ways to value a business, looking at the earnings multiple and the cash flow multiple are two of the easiest.

The company is currently expected to generate earnings per share (EPS) of 18.9 cents, according to Commsec, in FY24. This puts the forward price/earnings (P/E) ratio at 21. The lower Telstra share price means it's better value, but it can be complicated to say whether this P/E ratio is better value than something like Wesfarmers Ltd (ASX: WES) and Metcash Ltd (ASX: MTS) when they're in different industries.

I'm not sure I could call it a 'bargain' with a forward P/E ratio above 20, but if we just look at Telstra shares, it's close to its low for the 2023 calendar year and better value than it has been for most of the year.

The business has provided guidance that its free cash flow after lease payments for FY24 is between $2.8 billion to $3.2 billion. The current Telstra market capitalisation implies that it's valued at 14.6 times to 16.7 times that guided cash flow. Those valuation numbers seem more appealing.

Is it a buy?

For investors interested in ASX blue-chip shares, or Telstra more specifically, I think the company is attractive to buy today.

I like that the company has shown an impressive record of growing its number of mobile subscribers over time. It's investing in its 5G network to maintain/expand its leadership in the mobile space, and increasing prices for subscribers in line with inflation (which is a useful organic boost for revenue).

Not only is the 5G network good for Telstra's mobile business, but it could be key for unlocking significant profit margin improvements for its home broadband division. If it can convince customers to switch from the NBN to Telstra's 5G-powered wireless broadband, it could mean that the ASX telco share would capture a lot more of the value of the household's monthly bill rather than some of it going to the NBN.

Telstra is expecting EPS growth in the next few years, which should be supportive for the Telstra share price, as profit growth is usually important for investors. It's looking to grow revenue and work on costs/productivity.

Improving profit can also lead to a growing dividend for shareholders. Estimates on Commsec suggest that it could pay an annual dividend per share of 18 cents, which would be a grossed-up dividend yield of 6.4%. I'd suggest this is a good time to consider the business, with a number of things going positively for the company.

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 positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Telstra Group and Wesfarmers. The Motley Fool Australia has recommended Metcash. 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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