Telstra Corporation Ltd (ASX: TLS) is Australia's largest telecommunications company with a market capitalisation of $53 billion.
It has generated huge amounts of profit and dividends over the years for investors, but I'm not confident it will beat the market over the next few years due to the following reasons:
NBN competitors
The NBN gives every telecommunication company an equal footing to sell NBN deals using the same infrastructure. Telstra owned a lot of the infrastructure before the NBN was created which gave it a competitive advantage.
The large telco players do get somewhat of a size advantage due to their economies of scale, but it isn't anywhere near as much of an advantage as before.
Telstra may find that it gets lower margins for its broadband customers and faces much more competition for new customers.
New mobile competitor
Telstra is seen as having the best mobile network out of all the telcos. Its mobile network is the one part of the business that is strong and growing. There isn't a NBN-style change coming in to replace Telstra's mobile network.
Telstra management can't have been too pleased when TPG Telecom Ltd (ASX: TPM) announced that it would be building its own network and joining the battle for mobile customers.
TPG may end up taking customers from Optus and Vodafone rather than Telstra. However, if TPG manage to take more than 600,000 customers then this would negatively impact Telstra, particularly if TPG can effectively offer bundled packages with other services.
Unsustainable dividend
Telstra is currently paying out more than 100% of its profit as a dividend. This is nice for investors focusing purely on income, but it isn't good for shareholders who want the share price to grow too.
This has happened before, Telstra kept on paying its high-yielding dividend a decade ago during the GFC. However, it hurts the balance sheet and means management have less cash to invest for growth. Management has flagged it will spend a few billion dollars upgrading infrastructure over the next couple of years.
I don't expect the share price to recover much whilst Telstra keeps paying out more than 100% of its profit.
Foolish takeaway
Telstra could be a good business to own for retirees who just want to maximise their income because it has a grossed-up dividend yield of 9.89%.
But with Telstra trading at 14x FY17's estimated earnings I wouldn't describe it as a bargain, even with its share price fall.
