Telstra Ltd (ASX: TLS) is Australia's largest telecommunications company, and is well-placed to defend that title as well as deliver solid shareholder returns, according to the team at Wilsons Advisory.
The Wilsons team has recently added Telstra shares to their Focus Portfolio, saying the company has a solid base and is likely to execute well on its T30 plans under which the company is targeting growth in earnings through cost management initiatives as well as higher customer satisfaction.
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Large base to build on
In a note to clients issued recently, the Wilsons team says, "With technology now integral to daily life, phones and fibre have become essential for most households and businesses, giving Telstra's earnings a defensive quality''.
The company's mobile franchise now accounts for about 60% of earnings, they say, while its infrastructure assets "generate annuity-like cash flows''.
As the Wilsons team explains:
These infrastructure earnings are underpinned by long-term, inflation-linked contracts; for example, the NBN pays Telstra $1 billion annually for access to its pits, ducts, and exchanges under a 30-year agreement.
Combined, the mobile and infrastructure businesses "provide a steady ballast to cash flow, supporting predictability and resilience for investors''.
On top of this solid base, the company's T30 strategy "signals a shift from transformation to growth", the Wilsons team says, with the company aiming to boost its cash earnings by mid-to-single digit figures.
As the Wilsons research note says:
Telstra's track record from T21 and T25 has been solid, with the group successfully lowering costs, reducing product complexity, and improving its product offering (e.g. expanded 5G coverage), supporting stronger earnings growth and improved profitability and operational focus. The group's recent execution gives us confidence in its ability to achieve its T30 goals.
Telstra, of course, has major competitors in TPG Telecom Ltd (ASX: TPG)'s Vodafone and Singtel-owned Optus; however, the recent triple zero emergency call outages suffered by Optus – Telstra's largest competitor – have tarnished the brand, working in Telstra's favour.
Returns to shareholders look solid
The size of Telstra's mobile businesses "supports a relatively predictable earnings outlook", the Wilsons team says, and its balance sheet strength supports "a sustainable and growing dividend, and delivering additional shareholder returns to drive earnings per share accretion where possible''.
Wilsons says Telstra's strong balance sheet means it has "significant headroom" to fund both its capital expenditure needs and shareholder returns.
They went on to say:
The company recently completed a $750m buyback and announced an additional program of up to $1bn, demonstrating management's confidence in the valuation and future cash generation.
They also like the Telstra dividend yield of 4.2%, "comfortably above the S&P/ASX 200 Index (ASX: XJO) at 3.2%".
