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UBS, a prominent brokerage firm, has highlighted Telstra Group Ltd (ASX:TLS) as a compelling investment opportunity for the 2025 financial year, citing the potential for robust combined returns from both share price appreciation and dividends. Telstra, Australia's largest telecommunications company, recently made headlines with its announcement of upcoming price increases for mobile services, a move that has bolstered UBS' confidence in the stock's long-term prospects.
The decision to raise mobile prices by between AU$2 and AU$4 per month later this year has resonated positively with UBS analysts. They noted that these price hikes exceed CPI inflation rates, which is seen as a positive indicator for Telstra's revenue growth trajectory. Despite expectations of increased costs for consumers, UBS' research suggests that overall consumer churn intentions within the telecommunications industry remain stable and low, particularly among less price-sensitive customers.
UBS believes there is further room for Telstra and the broader telco industry to increase mobile average revenue per user (ARPU). The brokerage firm perceives that the market may have underestimated the industry's ability to capture the full extent of recent price adjustments, potentially leading to higher-than-expected revenues in the coming quarters. Moreover, UBS anticipates potential upside from Telstra's InfraCo's intercity fibre project and expects better-than-forecasted cost reductions beyond FY25.
In terms of financial outlook, UBS forecasts Telstra's dividend to grow at a compound annual growth rate (CAGR) of 8% over the next three years, driven by anticipated profit growth. This growth trajectory could potentially lift Telstra's earnings per share (EPS) to 25 cents by FY27, reflecting a positive trajectory in shareholder returns.
Currently, Telstra's shares are trading at under 22 times FY25's estimated earnings, according to UBS' valuation metrics. With a price target of AU$4.40 per share, UBS suggests a potential 13% upside in Telstra's share price over the next 12 months. Additionally, UBS projects Telstra to pay an annual dividend of 19 cents per share in FY25. This dividend yield translates to approximately 5% on a fully franked basis and 7% on a grossed-up basis, factoring in tax credits for shareholders.
UBS underscores the potential for Telstra to deliver a total gross return of around 20%, comprising both dividend income and potential capital appreciation. While achieving a 20% return in FY25 remains contingent on various market factors, UBS remains optimistic about Telstra's profitability outlook following the announced mobile price adjustments.
