Why Telstra will maintain industry dominance
Even as the telco's shares continue to slide following a weak trading update and shareholders question the long-term outlook, Brian Han explains why he remains optimistic.
Brian Han: The current investor sentiment towards Telstra is probably the lowest that I have seen since 2010. Now, just to remind you, 2010 was that time when Telstra's mobile business was spluttering, and it was upgrading its network with lot of money so that it can keep up with the competitors. And that was the time when negotiations with the nbn about its rollout and compensation to Telstra were at the most heated.
Now, fast-forward to now, we have a situation that's very similar. Telstra's mobile business is suffering from intense competition and is going to get even worse when TPG Telecom comes into the market. We have a situation where Telstra is now spending a lot money to upgrade and extend its network advantage over its peers in terms of mobile.
And on top of that, the NBN is actually wreaking havoc with broadband industry margins and everybody is suffering. So, these are short-term worries and investors should be excused for worrying about the stock price and Telstra's future.
But we at Morningstar, we look longer-term out, as we always do, and longer-term out, we do see Telstra maintaining its dominant market position in the telecom industry because it is investing to maintain its network advantage and we do believe longer-term there are potential for 5G to bypass the unsustainable economics of nbn and make it more profitable for Telstra to gain subscribers and customers.
In the meantime, we do believe that 22 cents dividend per share is sustainable because Telstra's balance sheet is still in solid shape. So, that equates to a dividend yield of 7.5 per cent. And we have a fair value of $4.40 on the share and current share price is at a significant discount to that fair value estimate.