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3 reasons the Telstra (ASX:TLS) share price is a buy

Here are three reasons why I think the Telstra Corporation Ltd (ASX:TLS) share price is in the buy zone…
The post 3 reasons the Telstra (ASX:TLS) share price is a buy appeared first on Motley Fool Australia. –

telstra shares

It certainly has been a disappointing year for the Telstra Corporation Ltd (ASX: TLS) share price.

Despite the telco giant hitting its guidance in FY 2020, its shares are down a sizeable 22% since the start of the year.

Here are three reasons I think the Telstra share price weakness is a buying opportunity.

Valuation.

At the current level, I estimate that Telstra’s shares are changing hands at approximately 20x FY 2021 earnings. I think this is good value for a blue chip company which has a strong market position and defensive qualities. Furthermore, it looks good value in comparison to some of its peers. For example, at present the TPG Telecom Ltd (ASX: TPG) share price is trading at 40x forward earnings and the Vocus Group Ltd (ASX: VOC) share price is commanding 23x forward earnings.

Attractive dividend yield.

The market appears incredibly divided on what dividend Telstra will pay in FY 2021. This is due to its guidance for the year ahead, which was softer than expected due to weaker roaming revenues. Based on its guidance, a dividend cut to somewhere in the region of 12 cents per share would be necessary given its current policy. However, it is worth noting that Telstra’s free cash flows are now greater than its accounting earnings. As a result, a shift to a free cash flow-based dividend policy would give it sufficient funds to maintain its 16 cents per share dividend. I’m optimistic that this shift will take place this year. If this happens, based on the current Telstra share price, it will provide investors with a fully franked 5.7% dividend yield.

5G internet.

Another reason I’m positive on Telstra is the arrival of 5G internet. Although it has been here for a little while, it hasn’t yet truly taken off. However, next week Apple will be holding its iPhone event and has hinted that its new phone will be 5G compatible. I believe this launch will be the catalyst for 5G to go mainstream in Australia, which should underpin improving mobile revenues in the coming years. Combined with the easing NBN headwind and its rampant cost cutting, I believe a return to earnings and dividend growth won’t be too far away for the company. This could make now an opportune time to make a patient investment.

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Returns As of 6th October 2020

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Motley Fool contributor James Mickleboro 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 3 reasons the Telstra (ASX:TLS) share price is a buy appeared first on Motley Fool Australia.

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