Telstra Corporation Ltd (ASX: TLS) shareholders have had a very encouraging month. Shares of the telecom giant were trading at $2.89 less than a month ago, but at the close of trade on Friday, the Telstra share price hit $3.24, its highest level since early October and a gain of over 11%.
I have long been bullish on Telstra. Here's why:
A strong brand name and superior network coverage give the company a significant competitive advantage or 'moat' over its competitors. This is evidenced by Telstra's position as the clear market leader in the Australian telecom industry, commanding dominance in fixed voice and broadband services, as well as a 48% market share in mobile service subscriptions. Telstra also has an estimated 50% market share in wholesale and commercial telecommunications services.
Telstra's CEO, Andy Penn is implementing a cost-cutting plan of around $2.5 billion in order to adapt the company's balance sheet for the post-NBN world. Rather than focusing on future dividends, Telstra is using its cashflow to invest heavily in 5G networks, which experts are predicting will be a huge growth driver in telecommunications over the next decade.
Why is the Telstra share price on the rise?
Telstra's share price movements have been heavily influenced in recent months by the attempts of telecom rivals TPG Telecom Ltd (ASX: TPG) and Vodafone Australia to merge their operations. Last week's announcement that TPG was abandoning its plans to build a 5G network in Australia due to the government's ban on Chinese company Huawei providing telecom infrastructure was mainly responsible for lighting the fire under Telstra shares. TPG was firming up to be a major price competitor to Telstra in 5G over the next decade, and its announcement is good news for Telstra's future market share.
Telecom companies are also considered a 'safe-haven' in times of turmoil as demand for their services is relatively unaffected by changing economic conditions. This is another reason why I think having Telstra as part of a portfolio is a great way to diversify as well as provide some ballast against any future stock market downturns.
Foolish Takeaway
With a P/E ratio of 10.7, I believe Telstra's share price is only starting to reflect its long-term growth opportunities and its significant competitive advantage in the industry. The company's vast portfolio of telecom infrastructure and its market dominance make it an attractive stock for any balanced portfolio.
