The Telstra Group Ltd (ASX: TLS) share price has been drifting lower, it's down over 10% since 16 August 2023.
When share prices fall, it means investors are being presented with an opportunity to buy a small stake in a business at a cheaper price. That usually means better value, though not every time.
The ASX telco share had been rising up until June 2023, but now it's going backwards even though profitability is increasing.
Focus on profit
Firstly, with a defensive ASX share like Telstra, I'd encourage investors to focus on which direction profit and cash flow are going. A cheaper price should mean investors are getting more bang for their buck.
In FY23, the business reported that total income rose 5.4% to $23.2 billion, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 9.6% to $8 billion and net profit after tax (NPAT) went up 13.1% to $2.1 billion.
In FY24, the business is expecting underlying EBITDA to be between $8.2 billion to $8.4 billion – that would be growth of 2.5% to 5%. If net profit can grow quicker than EBITDA, then it could lead to another solid year.
There's a lot of noise in the market right now, but things are looking positive for Telstra's underlying financials.
What about inflation pain?
It's certainly true that inflation is increasing Telstra's costs. However, last year the business decided to increase prices for mobile subscribers in line with inflation and it continues to increase prices for customers.
If inflation continues, I expect that Telstra will keep passing on price rises to subscribers. This should mean that Telstra's profit margins are protected and could even grow.
On top of that, the reopening of Australia's borders means more immigration (meaning more subscribers) and the return of tourists has led to a return of roaming charge revenue. All of these extra users utilising the existing Telstra infrastructure is helpful for profitability.
Is the Telstra share price a buy?
I'd certainly say it is, as a blue-chip pick. I'm not expecting Telstra's share price to double any time soon, but the ongoing solid dividend income and growing earnings should be good for shareholder returns.
According to Commsec, the business could pay a grossed-up dividend yield of 6.75% in FY24.
To add to the positive commentary, Jabin Hallihan from Morgans recently wrote on The Bull that Morgans has a hold rating on the business, and said:
The telecommunications giant has achieved returns above its cost of capital, distinguishing it from competitors. TLS and the sector is benefiting from favourable trends, including rational market behaviour, price increases and operational cost reductions. Telstra offers defensive qualities in volatile markets and during times of macroeconomic concerns. We have a $4.20 price target.
The price target implies a possible 10.5% rise in the Telstra share price over the next year.
