With the Telstra Corporation Ltd (ASX: TLS) share price down by 7% since the beginning of last week, is now the time to be buying Telstra shares?
Let's attempt to answer this question by looking at Telstra's latest half-year earnings and the recent Federal Court decision to approve the merger of TPG Telecom Ltd (ASX: TPM) and Vodafone Australia.
Impact of TPG-Vodafone merger on Telstra's future
I believe that the Federal Court's decision to allow TPG and Vodafone to push ahead with their merger plans will have some degree of positive impact on Telstra's long-term growth prospects.
With the potential of a fourth mobile operator entering the market now fairly much eliminated, Telstra will only have to contend with two major competitors in the mobile space, namely Vodafone-TPG and Optus.
A fourth mobile operator entering the market would have no doubt raised market competition. Having said that, I believe that any benefit Telstra is likely to gain will only be small as the merger of Vodafone and TPG is likely to create a much stronger third competitor in the mobile sector.
How did Telstra perform in the first half of FY 2020?
In its first-half results for FY20, Telstra revealed it is well on track to achieve the goals it had put in place as part of its T22 strategy. The idea behind this strategy is to see the company evolve into a leaner, more efficient telco provider in a new era of Australian telecommunications that revolves around the National Broadband Network (NBN).
During the first half, Telstra was able to reduce its underlying fixed costs by 12.1% or $422 million. This takes the company's total underlying fixed cost reductions to around $1.6 billion since FY16.
Although Telstra reported a 6.6% decline in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $3,875 million, this decline was anticipated as it includes the negative impact of the rollout of the NBN.
Before the NBN, Telstra received much higher margins from its fixed broadband network. However, as the NBN is progressively rolled out, this benefit has been gradually reduced. It should be pointed out though that Telstra was well financially compensated for handing over the fixed network to the NBN. Excluding the negative NBN impact in the most recent half, it is interesting to note Telstra actually recorded an EBITDA increase of $90 million.
In its half-year release, Telstra also reconfirmed its FY20 guidance. The telco is expecting underlying EBITDA in the range of $7.4 billion to $7.9 billion and free cash flow after operating lease payments of $3.3 billion.
Considering these relatively strong guidance figures, I believe that Telstra's current dividend payment looks sustainable over the next two years. Telstra shares currently offer a trailing dividend yield of 2.87%. This jumps up to an attractive yield of 4.6% when including special dividends, which then turns into 6.56% after taking advantage of full franking.
Foolish takeaway
I believe that in light of Telstra's relatively solid first-half results, the good progress it is making on its T22 strategy and the recent share price correction, Telstra shares remain in the buy zone.
In addition, telecommunications is a fairly defensive market segment and I don't see the coronavirus having a significant impact on the usage of telco services.
Although a few customers may shop around for a cheaper deal, most see it is an essential service and will continue to use their current service regardless of the prevailing market conditions.