The Telstra Corporation Ltd (ASX: TLS) share price is an interesting one to think about at the current level.
It has pleasingly risen since the start of 2021. But when you compare it to the price of around two years ago, it hasn’t really changed.
What has been driving the Telstra share price higher?
There may have been a few different things.
In November 2020, after the efficacy of the COVID vaccines was revealed, a whole range of ‘value’ shares around the world surged higher. Essentially, shares that hadn’t done well during the pandemic were sent higher on the expectations that vaccines could see the world return back to ‘normal’.
But there’s more to it than that for Telstra.
Asset sales
Telstra has been looking to extract the best value it can for shareholders from its business.
Making operating profit from telecommunications plans is one thing, but it also has an array of assets that it could monetise.
It has announced a deal to sell a 49% minority stake of its mobile towers business for $2.8 billion. This allows Telstra to maintain control of the business and still receive a great amount of cash.
Telstra is going to return half of the net proceeds to shareholders. The other half will be used to pay down debt.
Lessening NBN impact
For the last few years, Telstra has been suffering from the impact of the shift of households moving over to the NBN.
This has meant more competition (because every telco is on the same footing) and lower margins for Telstra.
As more households shift, this lowers Telstra’s profit compared to the prior year.
This shift is nearly over, which will hopefully mean the end of declining household broadband profit.
It has probably been a large factor for the Telstra share price decline in recent years.
The headwind will be removed for Telstra at some point and it will hopefully be closer to generating profit growth again, even if it’s from a lower base compared to five years ago.
Rising average revenue per user (ARPU)?
It’s possible that Telstra’s ARPU may be increasing. That may be hard to believe with how much competition there is in the mobile space.
But there could be a couple of key factors.
First, telcos may be realising that a race to the bottom doesn’t help anyone. There have also been some acquisitions that have removed some of the disruptive names from the game. Optus bought Amaysim. The TPG Telecom Ltd (ASX: TPG) business is now the combined businesses of the old TPG and Vodafone.
Another factor to consider is that Telstra is now selling 5G services. It can charge a bit more for that ultra fast service. Time will tell how much more profit it can make from 5G. There is potential for home internet to be powered by 5G, which could see Telstra claw back the margin from the NBN.
Final thoughts on the Telstra share price
I’m still not fully convinced that Telstra is going to start producing good organic profit growth in FY22. However, it’s certainly getting closer.
At the current level, it offers a fully franked dividend yield of 4.25%. Not bad, but there are other ASX dividend shares that I believe can generate more growth from here.
