Here’s why one fund manager thinks there is value in Telstra (ASX:TLS) shares

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The Pengana Australian Equities Fund has said that despite near term headwinds, it thinks there is value in Telstra (ASX:TLS) shares.

Writing in its May performance update, the fund said it thought Telstra was taking the necessary steps to ensure its incumbency as the dominant domestic mobile telephony provider remains intact.

The fund’s investment thesis had anticipated the aggressive pricing behaviour by the likes of Vodafone and Optus as they prepare for the entry of TPG Telecom (ASX:TPM) as the 4th participant in the next 12 months.

TPG is planning on launching a mobile plan with unlimited data, which subscribers will get for free for the first six months. The TPG offering won’t have voice call functionality at launch.

Value in Telstra shares

The fund said that after a period of rebasing, Telstra should be able to leverage its superior network and 5G offering to stabilise and even modestly grow earnings.

“With 50 per cent of the Telstra valuation underpinned by what is ultimately Australia’s premium mobile infrastructure asset, and a further 30% supported by a recurring (predominantly Government backed) NBN annuity stream, despite near term headwinds we think there is value in the shares.”

The Telstra share price has come back to life recently, jumping 5 per cent higher to $2.90 after two brokers upgraded Telstra shares, giving the company a $3.30 share price target.

Citi recently said Telstra should cut its dividend to 14 cents per share to enable the company to focus on maximising its long term profitability.

Telstra shares are currently trading at $2.96. On a trailing basis, Telstra shares trade on a fully franked dividend yield of 7.4 per cent, or 10.6 per cent when grossed up for franking credits.

If the Telstra dividend was cut to 14 cents per share, the fully franked dividend yield would come down to 4.7 per cent. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au