COVID-19 is dealing severe blows to our beloved blue chips. Lockdowns are forcing retailers to close, travel bans are causing airlines, such as Qantas, to be on life-support, and the ‘Big Four’s’ dividends are under threat.
Despite the ASX bloodbath, Telstra (ASX: TLS), the defensive veteran, is successfully bobbing and weaving the virus’ punches. Telstra’s success in the ring maybe because of their long term history or the fact that millions of people depend on their mobile phones.
Today we are discussing how Telstra is still standing, how COVID-19 is affecting Telstra, and whether the Telco giant is worth the investment?
Why is Telstra still standing?
Could you live without your mobile phone and the internet throughout the virus? The answer to this question is a critical factor in why Telstra is surviving.
Whether it be to skype grandma, make a work call or even binge watch YouTube videos to drown out the crisis, it’s clear that we all need our phones through these unprecedented times.
Telstra is a 45 year old veteran. Management have navigated the Telco mammoth through the unkind waters of the 1987 crash, the 2000-2004 dot come crash, the GFC, and the SARS outbreak. Providing investors with the reassurance that Telstra is well equipped with the economic knowledge to survive the coronavirus.
Lastly, investors want to hold reliable dividend companies during a crisis. Between 2000 and the GFC Telstra was the best dividend stock. Thus it should come as no surprise that investors see Telstra as an attractive and safe investment during the coronavirus. Especially when our ultra-low cash rate of 0.25% is limiting the areas in which investors can generate a stable income yield.
How is COVID-19 impacting Telstra ?
Telstra is not immune to the coronavirus. While their abs of steel are withstanding the punches, COVID-19 is still forcing the telco giant to implement drastic measures. These include:
1) Telstra is not laying off any employee for the next 6 months
The company will still strive to reduce fixed costs by $2.5 billion by the end of FY22. However, the $2.5 billion target will not involve any lay-offs over the next 6 months.
2) Telstra is hiring an additional 1000 employees
In turn, the new recruits will ensure that call centre volumes are kept at an optimal level.
3) Telstra is bringing $500 million forward in capital expenditure
Allowing the telecom leader to increase the speed of their existing networks and accelerate the rollout of 5G.
4) Extending a helping hand to small businesses and customers
Any small business or customer who is unable to service their Telstra bills will see their payments be suspended until the end of April. In turn, earnings should suffer in the short term, but the customer is kept happy, which should sustain long-term growth.
5) Reductions in 5G and existing network pricing
Telstra’s game plan was to increase the price of 5G in July. However, with the lack of jobs and an expected recession or even depression, people’s discretionary income is contracting. In turn, the economic decline limits Telstra’s ability to charge extra for 5G or even upsell customers to higher plans.
To add insult to injury, the coronavirus is disrupting global supply chains, which may delay the rollout of 5G.
All in all, Telstra is receiving fewer wounds than are other blue chips. Without a doubt, Telstra will suffer in the financial and dividend department. However, the telecom behemoth can still meet their FY20 earnings guidance. Which speaks volumes as many other companies, such as Qantas (ASX: QAN)and Harvey Norman (ASX: HVN) are withdrawing their guidance due to the volatility.
Is Telstra worth the investment ?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
In my opinion, Telstra looks like a promising long-term investment.
Moreover, Telstra has proven time and time again to be a safe hold during economic uncertainty. Thus, if the Australian economy worsens, then we can expect investors to flock to the telecom captain.
Without a doubt, Telstra holds risks. Telstra faces an uphill battle, much like the banks, in keeping their finances and dividends at a level that still pleases investors. UBS forecasts a 12.5% cut to Telstra’s dividend.
Lastly, with UBS (BUY), Goldman Sachs (BUY), Morningstar (Undervalued), and Consensus (Moderate BUY) all rallying behind Telstra, you could argue that TLS is an attractive investment. However, your own research is needed, of course.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior manager of YIG.