Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
Telstra is one of the most talked-about shares on the ASX. Not only is it one of the biggest businesses on the ASX with a market capitalisation of around $38 billion, but it is also one of the most widely held ASX shares, particularly by older investors due to the big dividend.
But, at the moment Telstra is dividing investors. Is it good value, or a value trap?
Telstra buy case
The Telstra share price is almost the lowest it has been since 2011. It's always better to buy shares when they are valued lower than when they're riding high.
At the moment Telstra is valued at just under 16x FY19's estimated earnings, which assumes a fairly significant drop of earnings this year.
If management stick to the sustainable dividend policy then the dividend is likely to be cut again this year, but even if the FY19 payout drops to 17 cents per share it still means the potential grossed-up dividend yield is 7.6% (or more). If more market declines happen then the high level of income could mean Telstra outperforms the broader market.
In the shorter-term the cost savings program that Telstra is doing is useful to help the bottom line. Over the longer-term 5G could be what rejuvenates Telstra's earnings. Automated cars and so on could be the services that drive demand for Telstra's mobile network.
Also, the potential merger between TPG Telecom Ltd (ASX: TPM) and Vodafone Australia could mean less price competition against Telstra.
Telstra bear case
Until 5G comes along there is a lot that could go wrong. The CEO Andy Penn has said that the NBN could cause earnings to drop by up to a half because Telstra lost control of the cable infrastructure.
There is a lot of competition out there for Telstra, with its peers trying to win market share with cheap prices and big data packs. You could say that mobile packages are commodity-like products where it is now boiling down to a price war. Indeed, Telstra has significantly increased the amount of data for the same cost.
Telstra has to invest in a lot of money to create the 5G network and there's a danger it will turn into another price war, leading to poorer returns.
Foolish takeaway
At $3.20 I think Telstra is a little overpriced. At under $3 it looked like it could be an interesting choice for total returns. I prefer Telstra as an idea compared to banks like Commonwealth Bank of Australia (ASX: CBA) because it is less likely to be affected by the house price declines.
