Why have Telstra shares lost 16% since May?

Since mid-May, the S&P/ASX 200 Index (ASX: XJO) has held up relatively well. Despite some volatility along the way, the ASX 200 presently sits about 2% above where it was back on 19 May. However, we cannot say the same for Telstra Group Ltd (ASX: TLS) shares.

Back in May, Telstra had just hit a new 52-week (and multi-year) high of $5.55 a share. Today, those same shares sit at a far less impressive $4.65 each. That's after the nasty 2.6% plunge that we are witnessing today.

Given that Telstra first started exploring this territory back in September, it might be easy to blame the telco's full-year earnings that month for the lacklustre reception Telstra shares are still on the pointy end of. To be fair, these earnings didn't exactly light up the room. Telstra reported a 0.8% drop in revenues to $22.94 billion. Despite that, the company still managed to reveal a 4.9% rise in underlying net profits after tax to $2.5 billion, as well as a 14% increase in cash earnings per share (EPS) to 25.5 cents.

This allowed Telstra to boost its 2026 final dividend by 10.5% to 10.5 cents per share. A $1 billion share buyback program was also announced.

So why then have Telstra shares taken such a dramatic plunge since May? Well, we can't totally rule out a poor reception ot these earnings. After all, if Telstra's revenues continue to flatline in the years ahead, its current price-to-earnings (P/E) ratio of 23.4 arguably starts to look a little generous.

However, I think there's another factor at play here: interest rates.

Telstra shares fall as interest rates rise

Telstra is first and foremost known as one of the ASX's best and most reliable dividend payers. Many, if not most, of those Australian investors who own Telstra shares do so with the expectation of receiving fat dividend cheques, with at least some franking credits attached.

As we've already touched on, Telstra is continuing to deliver in this department. But perhaps the problem is the growing attractiveness of alternative sources of passive income.

2026 has been a dramatic year when it comes to interest rates. The Reserve Bank of Australia (RBA) has already hiked rates three times this year. Although the cash rate now sits at a 15-year high of 4.6%, many commentators anticipate it hasn't finished its current cycle yet. Most Australians understandably associate high interest rates with more painful mortgage repayments. However, this 4.6% cash rate has also resulted in the returns from term deposits and savings accounts exploding. Today, and for the first time in 15 years, one can open a term deposit with an interest rate of over 5.5% per annum – unheard of for years.

Back when Telstra was sitting at $5.55 a share, it would have only been offering a dividend yield of under 3.8%. You can see why more than a few investors would just take the risk-free 5% return instead.

Perhaps the company is finding more buyers at the current price of $4.65. That offers up a much improved 4.52% yield. But as a company that could be described as a bond proxy, I don't find it at all surprising to see demand for Telstra shares drop off when risk-free passive income is looking so lucrative. Unless Telstra can start growing its revenues at a healthy rate again, or until interest rates start coming down, I'm not expecting to see Telstra shares back above $5 anytime soon.

The post Why have Telstra shares lost 16% since May? appeared first on The Motley Fool Australia.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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