Since hitting a 52-week high of $6.53 in August 2015, shareholders of Telstra Corporation Ltd (ASX: TLS) have seen the value of their shares tumble by more than 20%.
This comes in stark contrast to a number of other telecommunication shares that continue to outperform. In fact, Telstra has been by far the worst-performing stock of S&P/ASX 200 Telecommunications Services Index (Index:^AXTJ) (ASX:XTJ) for the past 12 months.
Admittedly, the index is made up of only three other constituents, Vocus Communications Limited (ASX: VOC), TPG Telecom Ltd (ASX: TPM) and Spark New Zealand Ltd (ASX: SPK), but the chart below highlights just how badly Telstra has performed in a sector where every other company has significantly outperformed the broader market over the past 12 months.
This comes as a surprise as Telstra is traditionally viewed as a defensive, income-generating stock that should help to protect portfolios during times of volatility. Unfortunately for many investors, its share price performance during the most recent period of volatility has been anything but defensive, and in fact, performed far worse than the broader market.
So what is behind Telstra's recent fall?
I believe a combination of reasons are behinds Telstra's recent under-performance including:
- Subdued Earnings Growth – Investors value stocks on future earnings and Telstra's short-term earnings growth outlook appears fairly subdued. Its first half FY16 results showed earnings per share (EPS) growth of just 1.8% and this level of growth is expected to continue into the second half. As a result of these low growth expectations, some investors have jumped ship and moved on to more attractive options elsewhere.
- Optimistic Valuation – This ties in with the point above. At $6.53, Telstra was trading on a price-to-earnings multiple of nearly 19. This high multiple and premium to the broader market would be difficult to justify for many investors considering Telstra's current earnings growth trajectory when compared to some of its competitors.
- End of the yield trade – It could be argued that Telstra's share price was unrealistically bid up by investors looking for a safe, high-yielding investment. Some analysts have suggested that the 'yield trade' is now over and the unwinding of some large positions has bought the share price tumbling down. While there is some merit in this argument, I still believe equity markets can offer excellent returns for investors looking for income to support their investment returns.
- Increasing competition – Telstra still remains the dominant player in the Australian telecom sector by some margin, but a number of rivals are stepping up their game and looking to take market share away from the leader. Competition in the mobile and broadband markets is fierce and a number of new entrants such as Amaysim Australia Ltd (ASX: AYS) are making life for the behemoth just that little bit harder.
- Reaction to expansion plans – With the lack of growth opportunities available in Australia, Telstra has made it clear it intends to further expand its operations into Asia. Investors, however, are becoming increasingly concerned that any international expansion plans will require significant capital investment and this could dramatically alter Telstra's risk profile and negatively impact on earnings and dividend stability.
Foolish takeaway
A number of factors have impacted on Telstra's recent share price performance and many of these issues are yet to be completely resolved. As a result, I don't see the shares trading above $6 anytime soon but I also believe most of the negative sentiment has already been priced into the current share price.
Telstra could still be a good long term investment and investors are now presented with a reasonably attractive value proposition. Trading on a price-to-earnings ratio of less than 15 and offering a fully franked dividend yield of 6.1%, the shares should be well supported from any major falls from here.
