The Telstra Corporation Ltd (ASX: TLS) share price may not be worth looking at yet (or ever).
What’s happening to the margin?
There was a report in the Australian Financial Review yesterday that said whilst demand for access to the internet increased during the COVID-19 pandemic lockdowns, telco margins continue to be under pressure and this is causing the return on invested capital to be unsatisfactory.
Low cost operators in the mobile sector continue to keep a lid on decent returns for telcos. Consumers can now get enormous data inclusions for a low cost. Telstra is having to spend a lot of money on building the 5G mobile network and it’s not making much money yet.
Things may change in the future, but at the moment 5G is simply included in some existing plans. So it doesn’t seem that Telstra will be generating any more revenue from customers, unless they’re on a cheap deal which doesn’t include 5G.
On the NBN side of things, as customers switch over to the NBN it continues to take telcos’ margins for itself to repay the large amount of money invested into the national network. Telcos are left with very little profit margin on the NBN deals.
One way for Telstra to grow 5G profit could be to offer home internet powered by 5G, replacing the NBN connection.
So hold off on Telstra shares?
At this stage I just don’t see how 5G can become a big profit driver for the company. There’s nothing that’s going to unlock more consumer dollars.
Perhaps in the distant future there will be future services and technology that needs additional high speed connections like automated cars, delivery drones or other things like that. But that’s not happening in Australia any time soon.
I don’t think it’s worth looking at a business where the profit is going backwards and there’s no substantial profit growth for the foreseeable future.
The dividend yield may be decent, but there are plenty of businesses that offer good growth potential and a good starting dividend yield like Brickworks Limited (ASX: BKW) and Magellan Financial Group Ltd (ASX: MFG).