James Dunn Switzer Financial Group 4 CONTRARIAN BUYS TO CONSIDER

Telstra (TLS:ASX)

• Market capitalisation: $32.5 billion
• FY 19 estimated yield: 6.2%, fully franked
• Analysts’ consensus price target: $3.18 (Thomson Reuters), $3.15 (FN Arena)

Telstra has had virtually uniformly negative commentary in the press and from brokers over the last couple of years, and the share price fall has mirrored this. One of the major issues has been the sale of Telstra’s copper network and hybrid fibre-coaxial cable network “crown jewels” to the NBN Co, in return for $11 billion in payments, and the heavy competition in the mobile business – in particular, the upcoming fourth mobile network from TPG Telecom, which is likely to increase the competition and price pressure on the major providers.

The new “Telstra 2022” strategy, with includes major cost cuts and establishing a special business to hold the company’s infrastructure assets, effectively splitting the company into two businesses, has failed (so far) to provide a springboard for the share price to recover.

But the new ultra-fast 5G mobile network is on its way, and Telstra boss Andy Penn believes that will give the telco heavyweight a base from which to rebuild. The point here is that Telstra is in a much stronger competitive position than its major competitors, in particular Optus and Vodafone, which will bleed cash when this technology is deployed.

Revenue, earnings and dividend targets for Telstra are very uncertain, but its competitive strength could easily turn into market share wins, and a share price recovery – which indeed was the case in 2011, when Telstra pioneered 4G. A new organisational structure announced today could also help.

An investor buying Telstra at these levels benefits from much of the risk having come out of the share price, and can reasonably expect a move higher. A warning, however, that the estimated FY19 dividend yield given above is based on a consensus analysts’ expectation of 17 cents a share being paid in the current financial year – this is by no means certain, and there are estimates in the marketplace as low as 14 cents (which would equate to a projected fully franked yield significantly lower, at 5.1%).