Given its blue-chip status and 5.6 per cent dividend yield, Telstra Corporation Ltd (ASX: TLS) understandably sits near the top of many income investors' shopping lists. Indeed, it's likely climbed a few notches higher with the news that Westpac Banking Corp (ASX: WBC) is the latest of the big banks to go to shareholders to raise additional capital.
Westpac's $3.5 billion capital raising is the latest example of the regulatory headwinds buffeting the banks that also have an outlook clouded by their leverage to an overvalued residential property market. As the prospect of dividend cuts comes onto the horizon so too does a potential rotation of retail money out of the banks and into other blue-chip high yielders.
Telstra is forecasting low-single digit earnings growth this financial year, with mid-single digit revenue growth and little in the way of regulatory headwinds. Although the telco's chief executive used its AGM this week to attack the Australian Competition and Consumer Commission for a ruling that it estimates may lop $80 million off Telstra's profits this financial year.
However, that's small beer in the context of expected cash earnings this year of $4.6-$5.1 billion and compared to the seismic effects of the regulatory changes being imposed on the big banks.
While those banks are forced to raise capital from shareholders, Telstra investors are enjoying the benefits of a $1 billion share buyback and recent dividend lifts being implemented at a higher rate than the banks.
Looking ahead
The telco though does face increased competition in its core Australian market after a recent merger frenzy beneath it that may give some competitors the scale required to challenge its market share.
Optus is one large-scale rival, while TPG Telecom Ltd (ASX: TPM) and overseas rival Vodafone have recently teamed up in a $1 billion fibre optic internet and mobile network expansion deal. The agreement will see all of TPG's existing mobile customers moved to Vodafone's network, while TPG will invest $300-$400 million to expand its fibre optic internet network to more than 3,000 Vodafone sites.
TPG is an aggressive operator that may prove a thorn in Telstra's side and the prospect of greater long-term integration with Vodafone may help the latter shake off its soft reputation as it attempts to win market share in Australia.
What's more, another TPG may be developing with the proposed merger of junior telcos M2 Group Ltd (ASX: MTU) and Vocus Communications Limited (ASX: VOC). This coming together would result in another mid-cap telco with the infrastructure, scale and brands to challenge Telstra in the growth sectors of cloud services, broadband and fibre-optic internet services.
The clear winner
Telstra has competition, but it remains limited compared to its own giant scale and the telco continues to operate the market-leading mobile network in Australia.
This helps it retain and grow customer numbers, while the huge cash flows provide the firepower to invest more than $5 billion into its mobile network out to June 2017.
Junior rivals cannot compete with this kind of capital expenditure and domination of the mobile space will be important into the future – with Telstra expecting mobile data traffic to increase tenfold over the next five years.
Other tailwinds are well documented with Telstra's cloud business growing at 20-30 per cent per annum for the last three years, while the potential connection of billions of everyday electronic devices to the internet also provides big growth opportunities in the years ahead.
That said Telstra remains largely a mobile company and primarily a yield play, although that won't worry those investors focused on income over growth.
Foolish takeaway
For the banks, capital raisings equal lower earnings per share and potentially lower dividends and share prices. Moreover, dividends are something of a sacred cow for many bank investors and, if sacrificed, a rush for the exits could be expected.
On the other hand Telstra has the wind at its back and the stock has steadily retreated in price since the Reserve Bank last cut cash rates in May 2015. However, with another rate cut an imminent possibility income seekers may do well to look to its defensive qualities as a counterweight to today's low cash rate environment.
