Saturday, August 15, 2020

Is the Telstra share price a buy?

Telstra

The Telstra Corporation Ltd (ASX: TLS) share price saw a welcome 2.63% boost today, but is still down around 10% this past year. Telstra’s yearly return is close in terms of performance to that of the S&P/ASX200 Index (ASX: XJO), which is down around 11% at the time of writing.

Here are 3 reasons why I believe the Telstra share price has been under pressure this past year.

Reason 1: An incredibly competitive environment

The merger of Vodafone and TPG, listed on the ASX as TPG Telecom Limited (ASX: TPM) creates a tougher environment for Telstra to operate in, as the merged entity can leverage their scale to offer more competitive solutions to customers.

In addition, Telstra’s once-held monopoly on the fixed line network has been eroded by the National Broadband Network (NBN).

In terms of customer satisfaction, Telstra continues to lag competition based off surveys and product reviews. A good measure of future performance of a company is customer satisfaction, and while Telstra is the most popular ISP in Australia according to Choice, it ranks below average for customer satisfaction. 

Reason 2: Foxtel impairment

On 8 May 2020, Telstra announced a $300 million impairment of its 35% stake in Foxtel. This reduces the carrying amount from $750 million to $450 million. While it is a non-cash expense (as it points out in the ASX announcement), it still decreases the value of the asset in the company’s accounts.

Unfortunately, I believe further impairments are to come because of cord cutting and the rise of streaming services. However, the return of sport should help Foxtel somewhat as this has been a major attraction of having the cable company in the home.

Reason 3: Belong 

Belong is owned by Telstra and offers cheaper prices and less services than the main brand. Belong offers internet and mobile services only. 

According to Telstra’s half year report for the period ended 31 December 2019, Belong is having an impact on the growth of its postpaid handheld retail customer services. While these services increased by 137,000 for the half, 91,000 of those customers were from Belong. Telstra stated in the report that a contributor to the decrease in revenue of postpaid handheld was due to a “modest dilution due to an increase in the Belong customer mix…”

This will decrease the amount of potential revenue Telstra could have received. However, it needs to compete with other telecommunication providers that are offering cheaper services.

What is there to like?

Telstra’s 5G network offering high internet speeds could attract people who are on the move and need fast mobile speeds. It still has a wider coverage than competitors, which widens its customer pool potential.

In mobile plans, sport offers a point of difference with mobile rights to AFL and NRL content (just to name a couple) included data-free.

Free cash flows remain strong to enable the continuation of dividend payments, at least in the short term to the medium term.

Foolish takeaway

Telecommunications is an incredibly tough industry to operate in. Competitive pressures are intense and has resulted in declining revenue for Telstra. Since 2017, dividends have been trending downwards as competitive pressures begin to manifest.

Additionally, its investment in Foxtel appears to be rapidly declining in value. I believe this is because of the rise of cord cutting as streaming providers are gaining immense popularity.

The Belong company offers a more competitive offering and is helping the growth in customers, but total income is still on the decline for the Telstra group.

Its 5G network and widespread coverage is an edge that its competition does not have, however, with so much of the population in city areas, I am not convinced it is a significant enough competitive advantage.

On balance, I think there could be better ASX shares rewarding investors with capital growth and income at the present time.

More reading

Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is the Telstra share price a buy? appeared first on Motley Fool Australia.

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