3 reasons why the Telstra (ASX:TLS) share price could be a buy

person on old-fashion telephone, surprised person

The Telstra Corporation Ltd (ASX: TLS) share price could be one to think about as the telecommunications business reveals a number of new compelling reasons to consider the stock.

Telstra has been working on its T22 strategy for a few years. That involved cutting costs and becoming more efficient.

But it has recently revealed a T25 strategy that may be even more compelling for a few different reasons:

Return to profit growth

Telstra management outlined that the company is now expecting profit growth to return after a number of declines due to the switch to the NBN and a lot of competition in the mobile space from low-cost players.

The telco said it’s aiming for sustained growth and value by targeting a compound annual growth rate (CAGR) of mid-single digit underlying earnings before interest, tax, depreciation and amortisation (EBITDA) and high-teen underlying earnings per share (EPS) between FY21 to FY25.

The T25 strategy is also looking to deliver another $500 million of net cost reductions, good cash conversion and generation, active portfolio management and shareholder value through an updated capital management framework. That $500 million is on top of the $2.7 billion it has already committed for T22, while at the same time investing for growth.

One of the key ways that investors may judge the Telstra share price is the profit it’s making and the growth expectations of that profit in the coming years.

Dividend growth

Under Telstra’s updated capital management framework, it has included the principle to maximise fully franked dividends and looks to grow them over time, to invest for growth and return excess cash to shareholders.

However, Telstra noted that it needs to grow its underlying earnings as well as its franking balance in order to grow its dividend.

The board are confident in maintaining a minimum annual payment of $0.16 per share. At the current Telstra share price, that translates to a grossed-up dividend yield of 5.8%.

Earnings diversification

Telstra is looking to diversify its earnings by expanding into different sectors.

It’s looking to launch energy services to go alongside its telecommunications offering. Telstra wants to establish a fully integrated channel experience so customers wanting a telco product or service, energy, tech equipment or integrated home solution, can use Telstra for it.

Another area that Telstra sees a big future is healthcare. One of the most recent moves in this area was an acquisition called MedicalDirector which it bought for $350 million. It provides software as a service (SaaS) across electronic health records, patient and practice management, billing, scheduling, care coordination, medicines information and clinical content. It currently supports around 23,000 medical practitioners and is used to deliver more than 80 million consultations a year.

Telstra wants to be a leading partner to the health and aged care sectors.

The post 3 reasons why the Telstra (ASX:TLS) share price could be a buy appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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