Telstra: the bull and the bear
It's been quite a rollercoaster ride for investors in our former monopoly telecommunications carrier since its listing on the ASX in three tranches starting 15 years ago.
By February 1999, the telco’s share price had reached just under $9.00. That was something of a marquee year, with the stock spending most of the year trading between $8 and $9 as the new horizons of the dot.com boom held sway.
Come the 2000s and the tech crash, Telstra crashed as investors the world over suddenly remembered that only future profits count, not eyeballs on a website or hopes and dreams of a brave new world.
Since those heady days, the share price went through a decade of steady falls, punctuated by the occasional rally, finishing the Noughties at $3.43. While investors since then have had a somewhat bumpy ride, the share price just over two years later is little changed.
If you bought Telstra in the last 12 months, you’d be forgiven for wondering what the grief is all about, with the share price having marched steadily upwards from $2.60 to around $3.20 for a gain of almost 25 per cent, even before dividends are taken into account.
Having bounced off those all-time lows of 12-months ago, the question for investors is whether we have had a relief rally, giving us a chance to sell out with some dignity intact, or if we will see a sustainable renaissance from here on.
Telstra is entering something of a brave new world. The company has come to terms with its structural separation, with the $11 billion dollar deal to sell its legacy network to the federal government’s NBN.
The deal leaves Telstra as an NBN reseller of home phone fixed line internet services, as well as its existing mobile telephony business, including 3G and 4G internet provision.
It’s not hard to see a massive migration of internet use to Telstra’s (and others’) 3G and 4G networks. Mobile browsing on smartphones is increasing enormously and that is only likely to continue (at a potentially faster rate) once 4G devices are available. If you haven’t yet tried 4G, the devices can access the internet at speeds effectively as good (or sometimes better) than home WiFi connections.
Telstra, considered to have the largest and fastest mobile network, as well as the highest brand recognition and considerable ‘'default option'’ positioning, stands to benefit greatly from this shift, and the broader move of our lives online.
While the telco will likely lose market share of home telephony and internet, the NBNCo has adequately compensated Telstra for this loss. The future growth of online data consumption puts the company in the box seat.
Knowing Telstra has a strong brand and considerable ‘'legacy'’ business as the incumbent and dominant telecommunications provider in Australia is one thing, but investing is like driving – you can’t do either by looking only in the rear-vision mirror.
The loss of the copper line network – long Telstra’s cash cow – shouldn’t be understated. The margin per dollar of revenue from fixed-line services dwarfs that of mobiles and other services.
The trend isn’t new – fixed-line has been losing customers year after year as people cancel their home phone services – but this deal excises that cash cow completely.
Telstra is also still learning to be a modern retail company. For years it was effectively an infrastructure – pits and wires – business, in government hands and with little to no competition.
Its initial years as a public company weren’t exactly textbook either – with government antagonism and a dividend that exceeded its profits par for the course.
If change is the only constant, then in investing, uncertainty is the only certainty. Telstra has enough of the former to have both bulls and bears certain of their positions.
Telstra’s share price at this level is probably underpinned by both the 28-cent annual dividend and the $11 billion coming from the NBN. That’s enough to suggest the risk/reward is tilted in favour of reward, and why I think Telstra has the right combination of factors to be a worthwhile addition to your portfolio.
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Scott Phillips is The Motley Fool’s feature columnist. Scott owns shares in Telstra. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).