Telstra

Telstra’s share price has soared recently, rising 11% since 9 Aug 12 (Hold – $3.89). It’s now well clear of our $4.00 ‘Sell’ recommendation, but we’re not going to downgrade. Telstra has been winning new customers and fielding fewer complaints – tangible evidence that it is adapting to become a more nimble retail-focused business. Business processes are also being simplified, saving the company $1.6bn.

Still, success is not guaranteed. Telstra Pt 1: Five major challenges (Hold – $3.54) detailed significant industry headwinds that even Telstra will struggle to overcome: converging technology and falling data prices. These trends continue.

Indeed, Optus (owned by Singtel) recently reported that total mobile industry revenues have started to fall. Fewer dollars to go around means competition is reducing revenue per customer – which for Telstra has fallen 5% in the past year. The company, which spent over $1bn on network upgrades in the past year, is struggling to recoup the cost of providing for ever-increasing data demand. Raising prices is an option but would no doubt temper customer growth.

And whilst the NBN compensation deal will yield Telstra around $11bn, it is not free money. It merely helps offset its rapidly declining traditional telephony business.

Growth in earnings—and therefore dividends—will be hard fought, and Telstra is likely to expand its Asian operations or make a tilt at a local media company to drive growth. It's a move that would bring risks – and opportunity.

All up, Telstra remains a complex beast. But on a forecast fully franked dividend yield of 6.5% we’re in no rush to sell. We’ve increased the prices in our recommendation guide to reflect the progress so far. HOLD.