Is it time to sell Telstra Corporation Ltd?

Is Telstra Corporation Ltd’s (ASX: TLS) modest fall in profits a concern for long-term holders?

Telstra Corporation Ltd shares are a staple investment to many local portfolios.

Whether it’s for income, relative safety or long-term growth potential, Aussies readily find spots in their portfolios for the 12.3 billion Telstra shares on issue.

August – reporting season – is an anxious time of year for shareholders, as we await the telco’s annual report.

This year, there were a few noteworthy announcements from the report:

  1. A final dividend of 15.5 cents per share was declared – taking the annual payout to 30.5 cents
  2. Total mobile subscribers rose to 16.7 million, from 16 million a year earlier
  3. Net profit after tax, or NPAT, fell 5.8% – reflecting the divestment of key businesses during the prior reporting period.

All-in-all, the result could be best summed up as mixed.

In the current low interest rate environment, if you’re chasing a tax-effective income (let’s face it, who isn’t?) Telstra’s latest results will likely be sufficient to keep you enthusiastic for the long-term.

However, judging by the market’s sell off of Telstra stock since its results were announced, there may be something more sinister hidden in the results.

A telco in transition

It’s been known for some time that Telstra is a telecommunications company in transition.

Anticipating the arrival of the Government’s NBN Co, the Internet of Things (IoT) and an increasingly competitive local telecommunications market, Telstra etched out a viable local and regional strategy which would see it become a nimble, technology-focused, communications giant.

However, Telstra’s 2015 financial year reminded us that turning a $74 billion ship around isn’t easy. The 2014 divestment of CSL, Telstra’s Hong Kong mobiles business; part-sale of Sensis and Autohome Inc; and a number of other meaningful acquisitions resulted in a slight fall in group revenue, profit and cash flow year over year.

Positively, a focus on customer service, driving value from the core and nurturing growth businesses continued to widen Telstra’s market leading position in mobiles.

Figure 01. Telstra mobile subscriber numbers and profitability

Source: Telstra 2015 Annual Report.

While revenue growth was aided by an impressive jump in Machine-to-Machine (M2M) and post-paid subscriber numbers within the Mobiles division – which accounts for 40% of total group revenue – it appears Telstra’s profit margins may now be stabilising after years of strong expansion.

Overall, group profit margins were once again weighed down by a decline in profitability of the fixed line and media products.

However, green shoots continued to emerge from the Network Application Services (NAS) and International divisions. Telstra previously stated its long-term goal was to derive one-third of revenues from Asia by 2020.

Telstra: still a rock-solid dividend stock

Fortunately, to date, the strategic choices made by Telstra’s management team (for example, negotiating a new NBN Co deal, acquisitions in Asia) have be well implemented.

At slightly above $6 per share, Telstra does not appear overly expensive. Although, its shares are no bargain either.

Indeed, despite the company announcing it has introduced a dividend reinvestment plan (DRP) for its latest payout, taking the cash and pursuing growth smaller alternatives mightn’t be such a bad idea.