Owning Telstra Group Ltd (ASX: TLS) shares gives investors exposure to the leading telco in Australia. That could be the sort of investment that might appeal to Warren Buffett. But, I'd suggest he would want to analyse the business before deciding to buy.
Warren Buffett is one of the world's leading investors who has led Berkshire Hathaway to become one of the world's largest businesses by buying quality companies with long-term growth potential. His investment returns have been an average of around 20% per annum over the decades.
There are a few different things Buffett likes to look for, so I'll look at a couple of those factors.
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Economic moat
Telstra is seen as having the strongest telecommunications network in Australia, with wider coverage, more spectrum and a greater number of subscribers. That could be the kind of economic moat Buffett likes to see.
The company has invested heavily in 5G to ensure that it continues to have the best network. According to Telstra's FY24 first-half result, the company's 5G population coverage reached around 87%, with 48% of mobile traffic on 5G.
Telstra's ownership of spectrum and its vast network reach give it a strong economic moat that Warren Buffett would like, in my opinion.
In the last couple of years, we've seen Telstra feel confident enough in the appeal of its network and loyalty of subscribers to increase prices in line with inflation.
I think Buffett would also like the fact that almost every household and business is paying for telecommunication services, making telecommunications a very defensive industry.
Growth
Warren Buffett usually likes to look at businesses that have good long-term potential.
Telstra has a significant market share already, so I wouldn't say it's likely to grow its market share a lot.
However, the company is winning a lot of new subscribers. In the HY24 result, it reported its mobile services in operation (SIO) rose 4.6% year over year, which represented an increase of 625,000. If Telstra keeps winning significant numbers of new subscribers, it can deliver good profit growth for shareholders.
Telstra is investing in several areas, including fixed wireless broadband for households, intercity cable infrastructure, cybersecurity, and more.
The HY24 net profit after tax (NPAT) rose by 11.5% to $1 billion, and the areas I mentioned above could help deliver profit growth in the coming years.
Has Warren Buffett invested in US telcos?
While we've never heard of Buffett investing in Telstra shares before, he has previously invested in some US telco shares.
However, he chose to dump the AT&T shares quickly after acquiring them, and Verizon didn't last much longer in the portfolio. But, in the last few years, Buffett has bought T-Mobile shares.
Those previous investments do not guarantee that Buffett would choose to invest in Telstra shares today, but they do show that he could be interested in the sector.
Are Telstra shares trading at a reasonable price?
Warren Buffett hasn't outlined exactly what valuation metric he likes to focus on when investing within Berkshire Hathaway's portfolio. It's also not clear what margin of safety he'd want either when it comes to price.
According to the broker UBS, Telstra shares are valued at 20x FY24's estimated earnings. Looking ahead to the 2028 financial year, Telstra shares are valued at 13.5x FY28's estimated earnings.
I think Warren Buffett would be intrigued by Telstra shares after their 15% fall in the past year. However, there's a fair chance the Omaha investor would prefer an even cheaper price before considering investing.
