Not upwardly mobile, Telstra holds the line

Telstra needed to pull a rabbit out of a hat yesterday to justify a "buy" tag. It didn't.

It produced earnings that were a bit shy of analysts' expectations given the second half was a bit weaker than the first. The share price dipped 8? to $3.89 in response.

It's not that Telstra has done anything wrong. It is still performing well, churning out cash, and sucking up handouts from the government to compensate it for the building of NBN infrastructure.

But the strong growth in mobiles it has experienced over the past couple of years will start to taper off in 2013. Telstra still expects to increase its subscriber numbers but not at the same rate.

It will look to offset this by increasing prices, but has to manage this process carefully to avoid the previous mistakes of overpricing and losing market share.

The game is not up in mobiles, but having now reached 60 per cent market share there is a limit to the pace of growth.

There are some brighter spots in the pipeline in other Telstra businesses areas, such as Network Application Services, which provides communications solutions to large organisations.

The Hong Kong-based CSL put in a good performance, as did the global connectivity business. But in absolute terms they are small, relative to mobiles.

And then there are the troublesome businesses.

Sensis better known as the Yellow Pages directories business continued to go backwards, with print revenue falling 22 per cent and margins slipping by 9 percentage points.

The headwinds from the decline in revenue from the fixed copper network continue.

The latest numbers (although not provided by Telstra) say 14 per cent of households no longer have fixed line connections. The trend will continue and more likely than not it will accelerate.

As is always the case with Telstra, the emerging technologies are required to offset those in decline. In 2012, the company managed to post a modest rise in revenue of 1.1 per cent, and an equally modest improvement in earnings before interest, tax, depreciation and amortisation (EBITDA) of 0.8 per cent both of which were inside guidance.

The company's outlook statement paints a fairly similar outcome for 2013 low single-digit income and EBITDA growth.

One of the reasons these forecasts can be relied on is the stellar job Telstra is doing in managing its cost base, and we should expect to see more of this in 2013.

While these results are not the sort to generally excite the market, there are a series of other factors weighing in to Telstra's share price performance, which this year alone has risen 16 per cent more than 2? times the rest of the market.

Its a combination of a flight to yield and reliability.

And this is scarce commodity at the moment.

There will be other companies reporting bigger improvements in 2012 earnings, but none have quantified a near-guaranteed dividend.

Given the rise in Telstra's share price, the yield isn't as attractive as it was a year ago but it certainly not bad at just over 7 per cent.

The other solid bit of information is that the government will drip-feed billions into Telstra's coffers in upcoming years $420 million was received in 2012.

While analysts now take the view that on financial fundamentals Telstra is fully priced, the trouble for investors is that there are few solid options out there in the market.

Punters can make a bet and buy plenty of what appear to be cheap stocks trading on low price earnings multiples, but they run the risk that earnings won't improve or may even slide and dividends will fall.

With commodity prices falling, investors have been bailing out of the big stocks such as BHP Billiton and Rio Tinto.

There are myriad cyclical stocks, but most have risks associated with the broader economic environment.

Telstra is far less sensitive to the vagaries of consumer sentiment, although mobile revenue from the small business segment did suffer in 2012.

But where is the next growth driver?

There is no real suggestion from management that Telstra will spend up big on acquisitions.

Rather, it appears to be placing its bets (and $500 million of capital expenditure this year) on its new 4G mobile network. Right now this reaches only 40 per cent of the market.

But increasing capex is not always as popular with shareholders as it is with management.

While investors were not really expecting any capital management announcements yesterday, nor an increase in dividends, either one would have offset any earnings disappointments and resulted in Telstra's share price ticking up even further.

The author owns Telstra shares.