Insights

Is the Telstra (ASX:TLS) share price undervalued?

Is the Telstra Corporation Ltd (ASX: TLS) undervalued at today’s share price? Here’s why I would buy Telstra: dividends and a 5G future.
The post Is the Telstra (ASX:TLS) share price undervalued? appeared first on Motley Fool Australia. –

Telstra

Is the Telstra Corporation Ltd (ASX: TLS) share price undervalued today?

At the time of writing, Telstra shares are going for $2.80. Last week’s bump which pushed the Telstra share price to $2.89 has evidently faded. At $2.80, Telstra shares are back near their 52-week low of $2.76 that the company made just 2 weeks ago. It’s been something of a fall from grace for the ASX telco.

Back in July and August, Telstra was trading around the $3.50 mark, not to mention the $3.94 52-week high we saw back in January. The levels we see today are even below the depths that Telstra shares saw during the March share market crash.

So are Telstra shares undervalued today? Or is the market onto something here?

Why Telstra shares have been tanking

We can trace Telstra’s share price decline back to the company’s FY2020 earnings report that was released back in mid-August. Although Telstra reported an earnings drop of 9.7% and income fell by 5.9%, the market was largely expecting those kinds of numbers. What really riled investors though, was the company’s guidance for FY2021. Telstra has a ‘payout ratio policy’ of 70-90% of earnings when it comes to its cherished dividend. In 2019 and 2020, Telstra has paid out 16 cents per share, fully franked, in dividends to investors. However, Telstra also told investors that it expects a ~$400 million hit to earnings in FY2021 as a result of the pandemic. If that eventuated, it would threaten the 16 cents per share dividend, as that would no longer comfortably fall into 70-90% of earnings.

Investors don’t normally buy Telstra shares for anything other than hefty dividend income. So it’s understandable why the Telstra share price fell 18% over the 2 months after the earnings report was released.

However, when Telstra recently held its annual general meeting, the company changed its tune somewhat. In acknowledging the importance of its dividend to shareholders, the Telstra chair told investors that the company was “prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70- 90% of underlying earnings to maintain a 16c dividend”. That sounds like a virtual guarantee that shareholders will be receiving 16 cents per share again in FY2021 to me.

Happy days… you would think anyway. Telstra shares indeed popped on this news (around 4%). But since then, the company has slid back to the levels we see today.

Is Telstra undervalued right now?

On current pricing, a 16 cents per share dividend gives Telstra both a trailing and forward dividend yield of 5.71%. That’s a whopping 8.16% grossed-up with Telstra’s full franking credits. Even if the Telstra share price goes nowhere over the next few years, that’s a pretty decent return just from dividends and franking credits (provided there are no dividend cuts of course). But given what the company has said about its dividend, I don’t think this is likely.

Further, I happen to think there are a few avenues for Telstra to increase its earnings outside the traditional fixed-line and mobile spheres over the next few years. Apple Inc. (NASDAQ: AAPL) has just released a new iPhone range – the first offering 5G connectivity. Since Telstra on-sells new phones, this is good news in my view. Telstra is also investing heavily in its own 5G network, which I think has a good chance of offering the best coverage in Australia. This could add to earnings growth down the road.

Foolish takeaway

Overall, I do think the Telstra share price is undervalued today. The company seems to be priced for a low-growth future filled with dividend cuts, which I don’t think will come to pass. Thus, I would consider buying Telstra as a value share today, especially if an 8% dividend catches your eye.

Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

Find out the names of our 3 Post COVID Stocks – For FREE!

*Returns as of 6/8/2020

More reading

Motley Fool contributer Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Apple. 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 (ASX:TLS) share price undervalued? appeared first on Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;


To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.


An active and funded account with a positive trading balance is required to continue to have access to the tools;


Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;


Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!