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Is the Telstra share price a buy for FY20?

Sebastian Bowen
Telecommunications, phone

If you had bought shares in Telstra Corporation Ltd (ASX: TLS) at the start of  FY19, you would have banked a 45% profit. In one year, Telstra has turned itself around from the stock everyone hated to the stock that everyone rushed to get back in. But will Telstra be the stock we were all wishing we bought this time next year again? Let’s take a look at this telco and see what we can find.

How did Telstra turn things around?

At the start of FY19, Telstra shares had just reached its lowest level ever – $2.62. Investors who bought in at $6.60 in early 2015 would have been disappointed to say the least. But a series of events, including the blocked merger of rivals Vodafone and TPG Telecom Ltd (ASX: TPM), TPG’s decision not to pursue its own 5G network and Vodafone, and CEO Andy Penn’s T22 cost-cutting plans have revived investor sentiment in Telstra shares and brought the company back in from the cold.

What’s next for Telstra?

Telstra isn’t expected to impress much when it releases its earnings on Thursday. Most investors (myself included) have long been resigned to a final dividend of 8 cents per share (down from 9 cents the previous year). This would translate to a dividend yield of 4.08% on current prices, which is still a solid yield, but a far cry from the 32 cents per share Telstra was paying just two years ago.

Saying this, even if the final dividend gets cut on Thursday, it should be (in my opinion) smooth sailing from this point. The T22 program and other structural changes at the telco should mean that earnings stabilise and underpin a sustainable payout ratio going forward.

Telstra investors are perhaps most excited about the future potential for 5G for the company. Although it is a ways from going full-scale, Telstra has been investing heavily in a 5G network and has been trialling its operation over the past years or so.

Optimists for 5G point to its potential to render the NBN redundant with higher speeds as well as facilitate the ‘internet of things’. I’m no tech expert, but I think if Telstra can build the first and best 5G network in Australia, it will be of great benefit to the long-term earnings of the company.

Foolish takeaway

Although I don’t think that a buy-in to Telstra today will get us another 40% rise by this time next year, I remain bullish on Telstra’s long-term future and consider Telstra a buy today for its healthy dividend and dominance in the telco space.

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019