The Telstra Corporation Ltd (ASX: TLS) share price has been a surprise outperformer in 2019 (touch wood). TLS shares started the year off at $2.77 but are trading for $3.65 at the time of writing – a YTD gain of 32.85%, even if you don't throw in the dividends.
At one juncture of the year (early August to be precise), Telstra shares breached the $4 mark for the first time since 2016. That would have represented a YTD gain of almost 45% if one had sold at that point.
These are startling numbers for a large, established utility/telco company like Telstra – so can we expect a repeat performance in 2020?
Why did Telstra shares have such a good year?
Rewind to almost a year ago, and the narrative surrounding Telstra was one of anger. Formerly ASX dividend royalty, Telstra was still dealing with the fallout from its savage dividend cuts from enraged investors – long used to a grossed-up yield north of 10% from TLS shares. Combined with the broader market sell-off that was gripping the ASX at the time and you can see why Telstra was plumbing depths not seen since 2010.
Picture yourself being one of the early Telstra investors who bought into the T2 IPO at $7.40 and you can probably understand the experience.
In my view, once it became clear that Telstra was unlikely to need to cut dividends again in 2019 – the appeal of Telstra's new yield of 5% became apparent and explains some of the gains this year.
In addition, investors have become very excited about the new 5G technology Telstra is heavily investing in. 5G is the 'next stage' of mobile internet and promises speeds far above the current 4G network. Possible applications for 5G include the 'internet of things' and even a possible alternative to the profit-sapping NBN network.
Will Telstra bank another 33% gain in 2020?
Another 33% gain in Telstra shares would translate to a TLS share price of around $4.90 on current pricing. Although I see this as a remote possibility if we get some exceptional 5G news, I don't think its too likely. Telstra is already dealing with falling earnings from the NBN rollout and that particular albatross will remain around Telstra's neck until at least 2022.
On current prices, Telstra is trading on 20 times earnings, which is already above the market average of around 18. From my perspective, the market is already pricing in the future risks against the future rewards that 5G might offer – and this is unlikely to materially change. Thus, I'm personally not expecting big things from Telstra shares next year – but I've been wrong before!
