Unfortunately for its shareholders, in recent years the Telstra Corporation Ltd (ASX: TLS) share price has underperformed the ASX 200 by some distance.
This underperformance has continued so far this year with the Telstra share price up 2.1% compared to a 3% gain by the benchmark index.
But could things be different as the year goes on? While I think the odds are against Telstra being a market beater this year, there are some catalysts that could make this a reality.
Below I have summarised both a bullish and bearish case:
The bullish case.
Telstra's shares appear to be priced for underperformance already. At 13.5x estimated FY 2019 earnings and offering a trailing fully franked 7.5% dividend, it looks as though the market is already expecting a disappointing FY 2019 and a cut to its dividend. If Telstra performs better than expected and maintains its 22 cents per share dividend, then I wouldn't be surprised to see its shares rally higher.
Other potential catalysts for a share price rally include the ACCC approving the TPG Telecom Ltd (ASX: TPM) and Vodafone Australia merger and the Federal government writing down the value of the NBN. The latter could allow the NBN to lower its wholesale prices, leading to improved margins for Telstra.
The bearish case.
While I think that the market has priced in a dividend cut now, if the dividend cut is more severe than expected it could lead to its shares de-rating. As I mentioned here, both Citi and UBS expect a 16 cents per share dividend in FY 2019. If this were to occur then I wouldn't be surprised to see its shares pull back around 9-10% to $2.65 where they would then offer a 6% dividend yield.
Another potential risk is the ACCC decision on the TPG Telecom-Vodafone Australia merger. If this merger is denied then it could result in even more intense competition in the telco space and put more pressure on Telstra's margins.
What now?
Time will tell what happens, but at this stage I'm more of a bear than a bull and feel Telstra's shares are likely to underperform again in 2019.
In light of this, I would suggest income investors skip Telstra and consider bank shares such as Australia and New Zealand Banking Group (ASX: ANZ) or National Australia Bank Ltd (ASX: NAB).
