Is Telstra Corporation Ltd (ASX: TLS) a compelling investment opportunity at today's share price for FY23 and beyond?
As the biggest telecommunications business in Australia, Telstra has a large position in the market. However, 'large' doesn't necessarily mean 'better' in terms of potential investment returns.
Over the past month, the Telstra share price has outperformed the S&P/ASX 200 Index (ASX: XJO) by about 2%.
Can this outperformance continue? No one has a crystal ball, but brokers like to estimate where they think a company's valuation could be in 12 months from now with what's called a 'price target'.
Let's look at where brokers think the Telstra share price could go over the next year.
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Broker ratings on the Telstra share price
The Telstra share price was $3.90 at the market close on Wednesday.
The broker Ord Minnett currently rates Telstra a buy with a price target of $4.65. That means a possible rise of about 19%. Ord Minnett is also predicting earnings per share (EPS) growth in FY23.
Morgan Stanley also rates Telstra a buy or 'overweight' with a share price target of $4.60. This suggests a possible rise of about 18%. One of the things that the broker likes is the potential for 5G to win customers onto wireless home broadband. That's where a home broadband connection powered by the NBN is replaced by a 5G-powered home internet connection.
The shift to the NBN hurt Telstra's margins. Getting households onto 5G home internet would be helpful for margins because Telstra would be providing the connection.
What could drive Telstra's earnings higher?
The Telstra share price could follow earnings. Rising profits could be helpful in several ways, including funding higher dividends.
The core tactics of the T25 strategy are cutting costs, delivering growth and "exceptional customer experiences", and continuing network and tech leadership.
In terms of cutting costs, Telstra says it wants to reduce its net fixed costs by $500 million between FY23 and FY25.
There are five areas of the business that Telstra is focusing on to achieve its cost reduction targets.
Telstra wants to:
- "Significantly reduce its IT operating costs", remove legacy systems, and consolidate platforms
- Transform the 'Telstra enterprise' customer value chain across the different processes
- Improve efficiencies in billing, assurance, and activation for customers
- Achieve further labour productivity across the 'back of house' and support areas
- Expand its productivity in sale costs, fixed costs, and capital expenditure.
Telstra earnings could also rise as the company increases its prices in line with CPI inflation. These increases could happen annually.
Dividend expectations
Morgan Stanley and Ord Minnett believe the telco giant will pay an annual dividend per share of 16 cents in FY23. This equates to a grossed-up dividend yield of 5.9%.
Telstra share price snapshot
Since the beginning of 2022, Telstra shares have fallen 7.6%. However, the ASX 200 has dropped 12.75%.
