Is the Telstra Corporation Ltd (ASX:TLS) share price a buy? There is a lot to think about the giant telco business at the moment.
The post Is the Telstra (ASX:TLS) share price a buy for 2021? appeared first on Motley Fool Australia. –
Is the Telstra Corporation Ltd (ASX: TLS) share price a buy for 2021?
I think it’s important to be an investor for the long-term. What happens over the next few weeks or months isn’t as important as what happens in the coming years.
Telstra has been going through a lot of change. The shift to the NBN has caused a decline in margins and profit. Management believe that by FY23 the negative earnings before interest, tax, depreciation and amortisation (EBITDA) impact of the NBN will have been fully absorbed and all the one-off payments for the NBN disconnections will have been received.
The change to the NBN has cost Telstra around $3.5 billion in recurring EBITDA when it is complete.
That’s a big hit to profit. It’s no wonder that the Telstra share price is down 47% over the past five years. It has also lost revenue from voice revenues, SMS revenue, global roaming and due to low-cost competition.
But that can’t be changed.
What the company has been working on over the past few years is its T22 strategy to become more efficient and lower costs. A kay part is a reduction of costs by $2.5 billion. Telstra is aiming to be one of the top quartile global telcos when it comes to cost efficiency.
The telco held its AGM this week. One of the disappointing points covered in the AGM was that its return on invested capital (ROIC) target of more than 10% by the end of FY22 won’t be achieved. The new target is ROIC of more than 7%.
Recent accounting changes reduce how ROIC is reported, so the original 10% target becomes 9%. Even so, Telstra said the goal still can’t be achieved in the original timeframe because of competition and COVID-19. But it’s aiming to increase the ROIC over time.
There were a few interesting, more positive points from Telstra from the AGM. Telstra Chair John Mullen was personally very excited by the potential of Telstra Health which is “growing fast”. It’s his personal view that one day Telstra Health will “be a real success story and a very significant contributor to the size and success of Telstra overall.”
The company also seemingly reaffirmed its annual $0.16 dividend per share for shareholders.
Telstra has said that to maintain the dividend it needs to achieve underlying EBITDA in the order of $7.5 billion to $8.5 billion, which the company is working hard to achieve.
But remember that the Telstra share price, dividend and earnings are coming under pressure from NBN, competition and COVID.
Telstra’s board said that it’s acutely aware of the importance of dividends to shareholders and, if necessary, is prepared to temporarily exceed its capital management framework principle of paying an ordinary dividend of 70% to 90% of underlying earnings to maintain a 16 cent per share dividend.
Does that make the Telstra share price a buy for dividend investors?
That dividend commitment is dependent on three factors. The first is whether an underlying EBITDA of $7.5 billion to $8.5 billion after the rollout of the NBN is achievable. The second is whether the free cashflow dividend payout ratio remains supportive and the company can retain a strong financial position. The final factor is whether there are other factors that would make the payment of the $0.16 dividend imprudent.
The dividend is not a guaranteed payment, though Telstra said it will do what it can to maintain the dividend and eventually increase it over time.
At the moment I just don’t see how 5G can generate a lot more profit for Telstra over the next couple of years. It may need to wait until more services come out that require additional connections like automated cars (which I think are at least a few years away).
I can understand why dividend investors are attracted to Telstra. The dividends of other popular ASX blue chips like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have been cut.
Telstra doesn’t offer much earnings growth at the moment, so I don’t think the Telstra share price can grow much either. A flat, at best, dividend isn’t that compelling in my opinion. There are other businesses that offer better dividend growth prospects like WAM Leaders Ltd (ASX: WLE) and Pacific Current Group Ltd (ASX: PAC) over the next few years.
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Returns As of 6th October 2020
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Motley Fool contributor Tristan Harrison 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.