Owning Telstra Group Ltd (ASX: TLS) stock is a puzzling investment idea right now. It's viewed as a clear market leader offering good passive income yet hasn't seen the same market gains as others in the last year like Commonwealth Bank of Australia (ASX: CBA) or Wesfarmers Ltd (ASX: WES).
As the chart above shows, the Telstra stock price is close to where it was a year ago, compared to the S&P/ASX 200 Index (ASX: XJO) which has risen more than 10% in the past 12 months.
When a growing business underperforms the ASX by a sizeable amount in a year, it's worth asking the question of whether there's an underappreciated opportunity here.
I'm going to look at three areas for Telstra: revenue, profit and the dividend. If all three are likely to rise, this stock could be a good one to consider.
Revenue
Revenue growth is normally the biggest driver of profit growth for a profitable company. Rising revenue is a sign that things are going well for the company and that its initiatives are working to grow its scale. A larger scale normally comes with a number of benefits, including stronger profit margins.
Telstra has a few different divisions, including fixed, enterprise and mobile. For me, the mobile division is by far the most important contributor to the business. Any growth from the other areas is a bonus.
In FY24, the mobile division added more than 560,000 net new handheld customers, along with growth in average revenue per user (ARPU). This led to mobile services revenue growing by 5.6%, and its mobile business underpinned its overall underlying earnings growth.
I think revenue is likely to grow in FY25. The telco announced in July 2024 that it would increase postpaid mobile pricing from 27 August 2024 and pre-paid mobile pricing from 22 October 2024. Most Telstra plans saw an increase in monthly costs of between $2 to $4 per month. Along with some subscriber growth, I think this price increase will be a useful contributor to support net profit.
In the long term, I believe Telstra's revenue can grow thanks to a bigger Australian population, an increasing number of connected devices, a potential shift to wireless (5G) home broadband, and its growth in other services such as cybersecurity.
Profit
Investors typically value a company based on its expected profit in the foreseeable future. I've already mentioned that revenue growth looks positive for the business.
Telstra has also been working on cost control with its T25 strategy. One of the T25 goals is to cut hundreds of millions of dollars of costs. Combined with likely revenue growth, it's probable Telstra's profit will rise in FY25. Increased AI usage throughout the business could also help reduce costs and increase efficiencies.
Broker UBS forecasts Telstra's net profit could grow to $2.15 billion in FY25. At the current Telstra stock price, it's valued at 21x FY25's estimated earnings.
Impressively, the broker currently predicts Telstra's profit could grow by approximately 50% from FY25's figure to $3.24 billion in FY29.
Telstra stock dividend
The ASX telco share has grown its annual dividend per share to investors in the last few years, and this streak is expected to continue in FY25.
According to the forecast from UBS, Telstra could pay an annual dividend per share of 19 cents in FY25. I agree there's a fair chance of that happening because of the likely underlying growth of its mobile division.
At the current Telstra share price, that payout translates into a forward grossed-up dividend yield of 6.8%, including franking credits.
Overall, I think Telstra looks like a good choice to buy right now with projected profit growth and a good dividend. The valuation looks particularly appealing compared to many of the ASX's other blue-chips like the banks.
