I have been wrong on Telstra. I thought it was a “buy in dips” type stock when I wrote back on 17 August to “hang on to your Telstra”. Since then, it has performed rather poorly.

In fact, it has been one of the poorer performers on the market over the last eight months. Since rising rapidly at the start of the year to peak at $6.70 on 6 February, it has fallen away. Last Monday, it touched $5.28, before closing the week strongly at $5.58.

Telstra Share Price – 24/10/14 to 23/10/15

Source: Yahoo!7 Finance, 26 October 2015

So, what’s gone “wrong” with Telstra?

“Wrong” might be too strong a word, but let’s have a look at what has happened at Telstra over the last few months.

Firstly, while Telstra marginally beat guidance and analysts’ expectations for its full year results, the second half pointed to some challenges ahead. In the important mobiles market, Telstra’s rate of growth in new mobile services slowed from 366,000 services in the first half to 298,000 services in the second half. While Telstra was able to maintain its EBITDA margin, average revenue per unit fell by $0.63 due to higher data allowances and lower excess data rates.

With Vodafone and Optus investing in their networks and fighting harder to win customers, the lead Telstra has had in mobiles is under attack. Telstra grew mobile sales revenue by 10.2% in FY15 – achieving this rate going forward could be more difficult.

And while not correlated in any way, Telstra’s mobile growth challenges have come to the forefront at the same time as some of the gloss has come off Apple. Apple’s shares are off 10% from their high of US$134.54.

Apple Share Price – 24/10/14 to 23/10/15

Source: Yahoo!7 Finance, 26 October 2015

Telstra also gave the market a bit of a scare back on 28 August when it went on the record to comment on speculation of a wireless joint venture in the Philippines with San Miguel Corporation. Given Telstra’s track record on offshore investments, this wasn’t initially seen as a positive. Not a peep since, however.

And as a defacto yield stock for many investors, Telstra’s share price has also responded to a cheapening in bank stocks. With some of the major banks paying dividend yields around 6%, Telstra’s forecast yield of 5.3% at a share price of $6.00 was interesting, but not compelling.

There have also been 2 ACCC rulings that have impacted Telstra since it announced its result in August. The first, relating to wholesale prices for mobile terminating access services, shouldn’t have any material impact on Telstra’s EBITDA in FY16, although it will result in a reduction in reported revenue of $350m. The second, to do with access for fixed line services, will knock EBITDA in FY16 down by $80m.

Finally, there has been the impact of a new CEO in Andrew Penn, and a number of chartists have identified technical reasons to sell Telstra. And of course, the analysts remain largely negative on Telstra.

The Brokers

The Brokers have never really liked Telstra since it became the favoured stock of SMSFs and others seeking tax-advantaged income, and the Telstra Board responded by putting so much effort into a commitment to maintain (and potentially increase over time) the dividend. In fact, I can’t remember a time when the analysts were bullish on Telstra.

They see Telstra as a fully valued, very low growth defensive stock, which is potentially vulnerable to competition. Free cash flow is being used to pay dividends, leading to a dividend payout ratio in the nineties.

According to FN Arena, the Brokers are remaining mildly negative on the stock. The consensus target price of $5.66 is 1.4% above Friday’s closing price of $5.58.

How to play

At its AGM, Telstra reaffirmed financial guidance for FY16. This is:

• Mid single digit growth in total income;
• Low single digit growth in EBITDA;
• Free cash flow of $4.6bn to $5.1bn.

They also went out of their way to talk about how they are not just a phone company, but rather their aspiration to become a “world class technology company”, and the investments they are making in video, cloud and e-health.

Barring some “black swan event”, Telstra shareholders can have a high degree of confidence that they will get a fully franked dividend of 31.5c per share, maybe even 32.0c per share, in FY16. At $5.58, Telstra is trading on a fully franked yield of 5.64% to 5.73%.

This puts Telstra in the buy zone. It is not a screaming buy, unless you buy the dream that Telstra can become a world-class technology company. I am not there yet – and nor is the market – although I do think some of the initiatives have promise, and to be fair to the Telstra team, it has come a long way over the last five years. However, still a buy in dips strategy.

Telstra is due to hold an Investor Day for analysts on Thursday (you can also watch it live on their website from 9.15am). It will be interesting to see if there is any change of sentiment from the analysts post the briefing.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.