Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?
Incredibly the Telstra share price has gone up 38% over the past year, which is an astonishing turnaround for a company the seemed to be in permanent decline.
Even the telco's most recent result, the half-year to December 2018, didn't make for good viewing. Telstra's income fell by 4% to $13.8 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) dropped by 16.4% to $4.3 billion and net profit after tax (NPAT) declined by 27.4% to $1.2 billion.
Do those numbers strike you as the good news that would send up a share price so much? Well, Telstra has been working hard on reducing its costs, which is important for a business with a high fixed cost structure. In the HY19 result alone the telco reduced its underlying fixed costs by $162 million.
Telstra wants to remove 8,000 full-time roles by FY22, with 3,200 of those gone at 31 December 2018. Over 1,500 of those positions were management and executive roles. Telstra expects to have reduced its job count by 6,000 by the end of June 2019. Telstra is also working on reducing its indirect workforce as well. It's terrible for the people losing their jobs, but it does help Telstra lower costs.
Another initiative that Telstra is working on is selling up to $2 billion of property and data centres. It could be a wise move to use the capital elsewhere, rather than owning property.
When you add all of the above things together, there's a lot of moving parts to the T22 plan. Investors seem to be on board with the idea.
As much as SMSF investors don't like the dividend reductions, they have also been necessary to put Telstra's dividend payout ratio at a sustainable level and improve the balance sheet.
Foolish takeaway
Institutional investors seem to like what they're seeing from Telstra. But a lot of the above movements seem to be one-offs which might not necessarily solve the fundamental issue of competition and the commodity-like nature of telecommunications that Telstra faces.
Telstra is trading at 24x FY21's estimated earnings. In my opinion this seems very expensive unless 5G can be unexpectedly good for Telstra's bottom line.
