Why has Telstra tanked? Is it a good time to buy, or sell?

Why has Telstra tanked?

For so long, Telstra has been a Market Darling … a great dividend-paying share, almost like the world’s best term deposit…but what has happened? They are out of favour with investors for the past 3 (or so) years…

 

What has gone wrong:

Telstra has warned investors to brace for a profit level at the lower end of its guidance range, but remains committed to a 22-cent total dividend payment. Telstra has blamed "challenging trading conditions" for a pre-tax and interest profit that is now expected to come in at the bottom end of a previously stated $10.1-$10.6 billion range.

CEOs and price - History:

Ziggy Switkowski – 1999 to 2004 – Oversaw the transition from government sector to privately owned, started in 1997. Went from $9 to $5. Sol Trujilo – 1/7/05 Went from $5 to $3.5 in his first year Back to $4.8 the next year, then down to $4.2 the next year Just before he left - $3 David Thoedy – May 2009 From a price of $3, it went to around $2.50 18 months later (at a low), but from there it rose to $6.50 at the start of 2015 – 5 years of positive gains Andy Penn – April 2015 Dropped from $6.60 to $2.70 2016 Aug – momentum has been on the oversold side

Sentiment

Competition - last 12 months alone - facing a fourth network operator entrant in mobile, an increasing number of MVNOs [mobile virtual network operators — basically companies that provide services through another telco's network] NBN – The Delays are having a negative effect on expected earnings Aggressively cut costs, with "core fixed costs" expected to decline around 7 per cent this financial year, with about $300 million in restructuring costs. Telstra is ramping up its capital spending on new technology, especially its 5G mobile rollout – 2016 – Announced $3bn in capex (capital expenditure) Fines - $10m of fines, but that is nothing Outages – Few outages nationally in the past few months

Financial metrics were near the bottom end of targets

Revenue expected to be around the middle of the $27.6-$29.5 billion range Free cash flow near the top, or even above, its $4.2-4.7 billion guidance. Big one: The decrease of dividends Raised Dividends, then cut by 30%! Earnings per share (EPS): Average about 32c per share for 10 years 2018: 29.3 EPS, 22 dividends per share (DPS) – 75% dividend payout ratio (DPR) 2019 – 27.5 EPS, 18.3 DPS – 66% DPR 2020 – 25 EPS, 22 DPS – 88% DPR History has been about 90% DPR

The fundamentals

Price/earnings ratio (PE ratio) – 8.99
– But what is the future earnings versus current prices? 2019 – 9.8 PE 2020 – 10.8 PE Yield – 10.1% plus FCs Income Coverage 8.96, Debt/Equity – 118.9% Financials – We are back to revenues of 2011

How much of the price is moved by fundamentals – very little! It’s really our response to the drop in dividend payments which has created such a massive decline in the price itself.

Telstra are in and out of favour with the market Is it overhyped? They need to turn themselves around in terms of management decisions go, because their success lays in what they are spending the capital expenditure on They are a decent term deposit – Though the price could go down more Will it ever grow again? Competition – Telstra still have a pretty decent market share and are semi protected through regulations