How UBS expects Telstra shares to gain 27% and deliver dividend growth

Having recently hit three year lows, UBS sees sizeable upside potential for Telstra shares.

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Telstra Group Ltd (ASX: TLS) shares haven't exactly shot the lights out so far in 2024.

To say the least.

Last Wednesday, 22 May, shares in the S&P/ASX 200 Index (ASX: XJO) telco closed at $3.42 apiece. That marked a three-year closing low for Telstra shares.

The stock came under renewed selling pressure after management announced their intentions to axe as many as 2,800 employees in a cost-cutting initiative.

And, in a move that's divided analyst expectations, Telstra said it would no longer increase its monthly mobile charges in line with inflation.

After recouping some losses over the following trading days, today Australia's biggest telco is again under pressure. Shares are down 1.4% at $3.46 apiece at the time of writing.

For some context, the ASX 200 is also down 1.3% at this same time following the ABS's hotter-than-anticipated April inflation print released this morning.

But with Telstra shares now down more than 20% in 12 months, the ASX 200 telco could be in for a sizeable rebound. And that comes with partial thanks to rival Optus.

Did Optus just boost the outlook for Telstra shares?

Yesterday, Optus announced that it would increase the price of some of its monthly mobile plans by 5% to 6%, outpacing inflation.

Management pointed to higher operating costs for the price rise, which will see the cost of Optus' least expensive mobile plan rise from $49 per month to $52 per month. Customers will also receive a higher data allowance from the service.

The last time Telstra shares enjoyed a revenue boost from higher monthly mobile fees was in July. With the ASX 200 telco having axed its CPI-linked price hikes, UBS now expects Telstra will next increase prices in 2025.

And the company now has greater flexibility to amend prices as it sees fit.

Commenting on the Singtel owned Optus price increases yesterday, UBS analyst Lucy Huang said (quoted by The Australian), "We view today's price hikes by Optus positively, as mobile rationality continues across the industry."

Huang added:

We note Singtel management last Friday had announced ambitions to improve return on invested capital at Optus which are currently below 2%, and we see mobile pricing as one of the key drivers.

As for Telstra shares, UBS believes the company will also boost prices to help lift returns.

"We note both key competitors have now put through above CPI price increases. Vodafone up 9% back in late March, and now Optus up 5% to 6%," Huang said.

And that could prove beneficial not just for the share price but also for Telstra's 2025 dividend outlook.

According to Huan:

We remain watchful on Telstra's next price change, with our base case assuming 3% postpaid average revenue per user growth in FY 2025, driving growth in the dividend from 18 cents in FY 2024 to 19 cents in FY 2025.

UBS has a buy rating on Telstra shares with a $4.40 price target.

That represents a potential upside of more than 27% from current levels.

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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