Telstra (ASX: TLS) could claim to be the safest blue chip on the ASX during COVID-19. Is it the most defensive share idea?
What is Telstra?
Telstra is our country’s oldest telecommunications business, having built the first telegraph line in 1854. In 2019, it provides more than 17 million retail mobile services, around 5 million retail fixed voice services (e.g. home phones) and 3.6 million broadband services. Telstra also has operations in eHealth, network applications and subsea cabling. In 1997 (until 2006), the Government sold Telstra to Australian investors by listing the shares on the ASX. The second batch of Government share sales, called “T2”, was conducted in 1999 at $7.40 per share.
Is Telstra the safest ASX blue chip?
As a telco, Telstra is in a good industry with defensive elements. I don’t know about you, but my home internet and phone internet are extremely important to me – for work, entertainment, communicating with people and so on. My (frugal) telecommunications bill is one of the things I’d still pay for if money was very tight. I’d imagine most Aussies with a smartphone would say the same thing.
In that sense, I think Telstra’s revenue and earnings should be pretty resilient.
At the height of worries about COVID-19 in March, the telco was still able to say it would be within the range for its free cash flow and underlying EBITDA (click here to learn what EBITDA means). As a reminder, that guidance is underlying EBITDA in the range of $7.4 billion to $7.9 billion and free cash flow of $3.3 billion to $3.8 billion.
So it’s very safe?
However, I think you also need to keep in mind what has been happening prior to COVID-19. Whilst Telstra’s existing earnings shouldn’t be hurt that hard during a pandemic or a normal recession, its profit has actually been falling because of the NBN.
Telcos are getting lower profit margins from the home broadband, the NBN has to recoup the large amount of money that was invested to build it.
So, whilst Telstra is fairly safe in the face of COVID-19, I don’t think it’s that safe in normal trading conditions. At least, not until 5G and new services come out. 5G could be an important step for Telstra, it may end up replacing the NBN connection for many households.
Is it the safest?
When I look at the list of ASX 20 shares, I think Telstra is safer than the big ASX banks and miners, and Telstra’s dividend probably isn’t going to be cut again any time soon. At best, miners are cyclical with minimal control of commodity prices. Banks are operating in a tough environment.
But I think shares like Wesfarmers or industrial REIT Goodman are better picks for safety. Wesfamers has seen an increase in revenue during this difficult period – Bunnings is a fantastic business – and Goodman is exposed to the large shift to eCommerce.