The Telstra Corporation Ltd (ASX: TLS) share price has been a disappointing performer in 2020.
Since the start of the year the telco giant’s shares have fallen almost 11%.
Is this a buying opportunity for investors?
I believe the weakness in the Telstra share price is a buying opportunity for investors for a number of reasons.
Firstly, I think the company’s shares are trading at an attractive level in comparison to their peers.
At present they are changing hands at 19x estimated full year earnings. This compares favourably to rival TPG Telecom Ltd (ASX: TPM), which is trading at approximately 29x estimated full year earnings.
Another reason I think Telstra’s shares are in the buy zone is its dividend yield.
As I have mentioned here previously, I’m confident that Telstra’s free cash flow will be sufficient to maintain its 16 cents per share dividend for the foreseeable future. Based on its current share price, this equates to a fully franked 5% dividend yield.
I think this is particularly attractive given the low interest rate environment we are living in. Especially when you consider that the cash rate looks likely to remain at a record low of 0.25% until at least 2022.
Improving outlook.
Another key reason I am bullish on Telstra is its improving outlook.
Thanks to the NBN rollout nearing completion, sizeable cost cutting, and the simplification of its business, I believe a return to growth is on the horizon. In fact, Telstra would have returned to growth in the first half of FY 2020 if were not for the NBN headwind.
For the first half, Telstra reported a 6.6% decline in underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) to $3.9 billion. However, underlying EBITDA excluding the in-year NBN headwind grew by approximately $90 million. This was the first time its EBITDA has grown since FY 2016.
So, with the NBN rollout now nearing completion, it won’t be long until this headwind is gone forever and management can focus on growing the business again.
All in all, I think this makes Telstra’s shares a great option for patient long-term focused investors right now.
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More reading
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 post Why I think Telstra shares are a strong buy appeared first on Motley Fool Australia.
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