ASX:TLS

Shares of TLS have been on a protracted downtrend since mid-February when their shares traded as high as $5.22.

Earlier this week, TLS Chairman John Mullen met with institutional investors to assure them that the dividend is unlikely to be cut further.

Telstra announced in September that its 2018 full-year dividend would be reduced by 30% to 22 cents a share…..which Mr Mullen said is effectively the floor.

At the current price of $3.45, a 22 cent dividend pencils out to a 6.3% yield.

It’s our base case that most of the bad news about TLS is priced in and accumulating shares in this price range is a reasonable investment.

Telstra

Shares of Telstra have touched a 5-year low near $3.82 in early trade.

Prior to today’s ASX open, the telco giant announced lower profit numbers and a reduction of the current year dividend from 31 cents to 22 cents.

In addition to the ordinary dividend next year, Telstra chief, Andy Penn also announced that the company would return up to 75% of one-off NBN receipts to shareholders via fully-franked special dividends over the next 12 months.

Further, Mr Penn gave an overview of the potential to monetize its NBN payments to support a “capital management” plan to “enhance shareholder returns”, most likely through a series of share buy backs.

With Telstra shares trading at $4.20, a 22 cent yearly total dividend pencils out to a 5.2% yield plus franking credits.

Our base case is that the domestic telco technology sector will continue to show above trend growth relative to peer sectors.

We expect Telstra’s leaner business model will contribute to the company’s profit potential over the next year.

We consider the share price oversold relative to fundamentals and prefer the long side from these levels.

Telstra

Telstra will announce its earnings report this Thursday, August 17th.

The Telco giant is expected to maintain its 15.5 cents per share dividend, which will take its FY 2017 total dividend to 31 cents per share.

At the current share price of $4.15, this pencils out to a dividend yield of 7.4%, which is respectable in the current market environment.

Some analysts expect TLS to cut their dividend guidance into 2018 as the government cuts the NBN related payments, and may rule unfavorably on the unsettled bandwidth sharing plan.

However, considering the share price has dropped over $1.00 since the beginning of the year, and the recent price action has shown good support at $4.00, we consider the risk asymmetrical to the topside over the medium term.

As such, we view TLS as a good dividend play with a medium-term target of $4.80.

Telstra

Telstra should push higher into the top end of the trading band, as shown on the chart below.

Yield hungry investors buying TLS for the compelling 7% fully franked dividend, will likely push the share price higher, before running into resistance at $4.80.

The last Algo Engine signal on TLS was a sell signal back in January at $5.25

Telstra shares got a boost today as the ACCC decided against letting rival Telcos roam their regional mobile network at a government fixed price.

Some analysts have estimated that mobile communications contributes about 45% of earnings, or $4.2 billion, in 2017/18. Telstra shares have jump by over 4% to reach $4.45 in early trade.

On April 20th, we wrote a blog piece about how TLS at $4.00 per share represented close to an 8% yield on their 15.5 cent dividend. We see value in the stock up to $4.50 keeping the forward yield in the 7.00% area.

Shares of Telstra have dropped close to 15% over the last month. When the shares traded at $4.00 on Tuesday, this was the lowest price since October 2012.

While some of the pricing fundamentals may be unclear going forward, from a pure yield perspective, we see the potential for value.

At current prices, if TLS matches it’s previous dividend of 15.5 cents in September, this puts the stock on a forward yield of over 8%; plus franking credits.

We consider this good value and like the long side of TLS for a move back over $4.50 in the medium-term.

 Telstra

Telstra shares are down over 4% in early trade as Australia’s largest telecommunication company announce half-yearly profits down 14.2% and revenue 3.6% lower.

The company reported half-yearly profits of $1.79 billion compared to $2.09 billion this time last year. Revenue fell to $12.8 billion from $13.3 billion over the same period of time.

Their EBITDA of $5.18 billion was at the low end of earlier guidance, which is a sign that Telstra is undergoing a difficult transition to the post-NBN world.

The company announced an interim dividend of 15.5 cents per share, fully franked, which returns $1.8 billion to shareholders.

Our Algo Engine created a short signal in January at $5.27

Until October 2016, TPG Telecom was the fast growing telco with almost 20% EPS growth whilst trading on a low 2% yield.

Then came the earnings update and the company suggested future EPS growth will be more like 5%. If Telstra is growing earnings at 3 – 5% and paying a 6% yield, why would an investor buy TPG on a substantially different yield or valuation?

You just wouldn’t. As such,  we’ve watched TPG sell-off from $12.50 to $6.20 and the stock is now back on a  4.5% yield. TPG will likely find buying support now and the market is hoping EPS growth will creep higher into the range of 5 – 10% to support the yield differential with Telstra.

We’ve been buyers of Telstra at sub $5.00 and we’re looking for the stock to trade $5.50 before evaluating a covered call option strategy.

We’ve been buyers of Telstra from the recent lows and see the possibility of the stock trading into the $5.40 to $5.70 range in the weeks ahead. We are undecided if we sell covered calls over TLS and will likely wait until the February earnings result, to see what the underlying EPS growth trends look like.

We have TLS on a 6% yield and delivering around 4 – 6% EPS growth into 2017.