Why the Telstra share price is underperforming the market

The Telstra Corporation Ltd (ASX: TLS) share price is under pressure as a new mobile war looms large.

Shares in our largest telco slipped 0.4% to $3.38 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) rallied 1.9%.

But Telstra isn’t the worst performer in the sector. The TPG Telecom Ltd (ASX: TPG) share price tumbled 3.1% to $7.84 at the time of writing.

This makes the newly merged TPG and Vodafone entity the second worst performer on the top 200 benchmark after the Alumina Limited (ASX: AWC) share price.

A price war that the market wasn’t expecting

Analysts weren’t counting on another mobile price war between mobile network operators, particularly not after Telstra lifted prices on some of its mobile plans.

I suspect Telstra was counting on Optus and TPG to follow suit after a period of price stability on the market.

The last mobile war put significant pressure on the bottom lines of three operators, and this time won’t be any different if a full-scale assault breaks out.

Shareholders have also seen the devastating impact on profits between the supermarkets when Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) went head to head in a race to the bottom.

The Telstra share price derailed

The miscalculation by Telstra will derail the very recent re-rating of the stock that took it to over $3.50 for the first time since early March when COVID-19 rattled the ASX.

Analysts who are bullish on the stock cited a sustained period of rational competition as one of the reasons to buy the stock.

Shareholders will be a little nervous now although the biggest reason to buy Telstra still holds true.

Is the Telstra share price still a buy?

This is for its dividend as the company should still be able to cough up at least a 16 cent a share annual payout for the foreseeable future.

This puts the yield on Telstra at over 6% if franking credits are included. That’s attractive in this unpredictable and ultra-low rate environment.

Unfortunately, yield isn’t something TPG has much of. Credit Suisse is forecasting a 10 cent a share dividend in FY20 and a doubling the following year to 21 cents. But even then, this puts TPG’s FY21 grossed-up yield at under 4%.

TPG slapped with “sell” recommendation

What’s more, the broker warns that the group’s earnings will be under pressure in FY20 due to COVID-19 restrictions.

“While the company has indicated that it expects to see both a decline in sales of prepaid and postpaid mobile services and lower roaming revenues, no explicit guidance has been provided,” said the Credit Suisse.

“We estimate the roaming revenue hit alone could be over A$100m, with near-term subscriber losses further exacerbating this impact.”

The stock is rated as “underperform” by Credit Suisse with a $7.35 a share price target.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited, TPG Telecom Limited, and Woolworths Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths 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.

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