The Telstra Corporation Ltd (ASX: TLS) share price has fallen hard, but it is not a clear-cut bargain.
Down goes Telstra shares
Telstra shares have been sold down heavily over the past year compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). Fears over the NBN Co changing the way broadband is delivered — and priced — has resulted in analysts and investors discounting the value of Telstra's fixed line businesses.
Adding to the selling pressure was news that rival telco TPG Telecom Ltd (ASX: TPM) plans to launch a 5G mobile network. Given TPG Telecom's success in distributing low-cost home phone and broadband packages, the fear is that it will also disrupt Telstra's lucrative mobiles business.
Having looked at Telstra's most recent financial results, I tend to agree that the business is in some strife. I'm not tipping it will go bust or anything of the sort.
However, put simply, Telstra's core businesses will not be as profitable in the coming five years as they are today, for more than one reason. For example, the company has too much debt and is facing some competitive pressures in various parts of its business.
While the decision to lower its forecast dividends is painful for income-focused investors, the 31 cents per share dividend was not sustainable in my view. Plus, good companies will retain more of their profit to grow their business long into the future, which is what Telstra has chosen to do.
Foolish Takeaway
Telstra is not going anywhere overnight. But it is important to remember that if you want to buy shares in the company you should go into it aware of the disruptive risks it faces within broadband and mobile.
I'm still getting my head around its valuation, so I'm not confident enough to call it a bargain at today's prices. Therefore, I'm happily watching it from the sidelines, for now.
