What to do with Telstra? It’s still lagging behind. Peddling backwards into oblivion. Telstra’s listing price was $3.60 via three tranches. The last payable in 2008. With Telstra sitting on $3.40, you’d be underwater if you’re still holding on. For one of the Australia’s most well-known brands, it’s been a horrible year for this Aussie icon. Sure it has provided investors with a handy dividend over the years but that too was cut. It’s unfortunate for retirees who bought the stock solely for its fat yield. The telco’s ability to maintain its premium pricing on mobile phones and keep its high profit margins is coming under pressure. So why are investors still keen to buy Telstra? Well they think there’s value in a beaten up stock. Morgans even slapped a Buy with a target price of $4.15. Well Telstra is cheap trading on a PE of 10x. But does cheap mean it’s worth buying? I’ve always been dubious of buying things on the cheap. If it’s cheap, it’s usually broken.The question is – Is Telstra broken? In this article I’ll try and answer just that. We’ll see if there really is value in Telstra that the market has overlooked and whether we can warrant a reason for buying it. At its last result the telco was savaged after it lowered its dividend. But after paying a dividend it couldn’t afford, maybe it was the right move. Telstra was in need of a capital restructure to become more competitive. The outcome of a capital allocation review included a change to the dividend policy to reduce the payout ratio to 70%–90% of underlying earnings. Telstra expects total dividends in respect of FY18 to be 22c fully-franked down from 31c. Whilst it wasn’t a welcomed move, it frees the company up and allows it to transition to better reflect the challenges in the industry. If you haven’t noticed the entire telco space is heating up with intense competition entering from all angles. There are two catalysts that will either make or break Telstra – 5G and changes to regulation regarding the NBN. So far the NBN has been a complete lemon. It’s not only failing but there are wide spread reports of delays and poor download speeds with mixed quality. Regional Australia is reporting slow speeds and numerous media reports are showing incompetency in construction and rollout. Since day one, there has been a lack of integration and planning by the NBN Co mixed with political instability. The result is a sub-par broadband project that fails to deliver on its promises. But here’s where things get gnarly. The Government has not accepted responsibility for delivering this lemon, but is intent on making wholesalers pay for it. This financial return is looking less likely. Why? As new customers transition onto the NBN, they have a myriad of services providers to choose from. Competing on the same playing field, they are all very aggressive on price and how they play. Each internet provider has to purchase how much bandwidth they need per month from the NBN Co. The more they buy, the less likely their speeds will slow down during peak hours. It’s called the Connectivity Virtual Circuit (CVC) and that charge is what the Government is hoping will cover the costs of the NBN. So for internet service providers to preserve their profit margins, they are forfeiting on capacity from their wholesaler. That means consumers are paying for NBN but receiving a slow service. Some poor souls are getting NBN internet speeds that are slower than their previous ADSL or cable broadband connection yet they’re paying a higher monthly charge. There is a high level of dissatisfaction with the NBN because of this. The Government can do two things from here. Introduce regulation so that this is prevented or write-down the value of the NBN and admit they were wrong. If the latter occurs, it will be a boon for Telstra and other service providers. The margin pressures will be removed and consumers will receive what they were promised. I was reading a Morgans report this week and it was mildly bullish on Telstra. It made three important points: FY18 will be challenging but Telstra will make it through. The board has reaffirmed guidance. EBITDA $10.9bn & $4.5bn Free Cash Flow. The 22c dividend should be as low as it…

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