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Why the Telstra share price is outperforming today

Brendon Lau
Telstra share price

Shares in our largest telecommunications provider is running well ahead of the market this morning after at least two top brokers upgraded the stock following the company’s investor briefing yesterday.

The Telstra Corporation Ltd (ASX: TLS) share price jumped 1.6% to $3.77 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.3% at the time of writing.

The stock got a boost by upgrades by Macquarie Group Ltd (ASX: MQG) and Credit Suisse with both brokers lifting their recommendations to “buy”.

Positive signs in key mobile market

The brokers have turned bullish on the stock due to signs that the mobile market has reached a turning point.

“There isn’t a material change to expectations from this update. Perhaps more pertinent is the greatly improved competitive environment across postpaid and to some extent pre-paid,” said Macquarie, which changed its recommendation on Telstra to “outperform” and lifted its price target by 25 cents to $4 a share.

“The latest changes from Optus support this, and handset subsidy is now largely withdrawn from the market. This is occurring in what is typically a very competitive period for Mobiles in the run into Xmas.

“We haven’t upped Mobile estimates, but these developments increase our confidence in our expectation for ~$250m mobile EBITDA growth in FY21.”

Dividends sustainable

Credit Suisse also thinks now is the time to buy the stock as it changed its rating to “outperform” from “neutral” and increased its price target to $3.90 from $3.70 a share. The increase in Telstra’s valuation is based on lower a capital expense assumption.

“In our view, TLS’ dividend remains sustainable at 16cps [cents per share] within the company’s existing payout policy, with one-off NBN receipts effectively filling the hole to 16cps over the next couple of years while underlying earnings decline,” said the broker.

“With the capex trending lower than D&A [depreciation and amortisation] over the forecast horizon (and debt metrics improving significantly from FY23 onwards) there may be some scope for the payout ratio to be increased.”

Foolish takeaway

This means Telstra is trading on a yield of around 6% if franking credits are included, although with the share price rally this morning, there doesn’t seem to be much upside in the stock.

The stock has also been running hot in 2019. The TLS share price increased by nearly 30% over the past year when the TPG Telecom Ltd (ASX: TPM) share price and Vocus Group Ltd (ASX: VOC) share price have fallen between 7% to 8% each.

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Motley Fool contributor BrenLau owns shares of Macquarie Group Limited and TPG Telecom Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and 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