Telecom: buy now or wait for the regulator's axe to fall

With Telecom's stock hovering near its 12-month low, the question is: where does it go from here?

Its current weakness is the result of four factors: looming regulation, a decline in calling revenue, a dropping dollar and the spectre of an economic downturn.

The stock's future depends on how much investors perceive these issues to have already been factored into the price.

Some analysts believe it still has lower to go, with the Government recently turning up the regulatory heat. A review of telecommunications regulation is scheduled to be completed by the middle of the year. The Government isn't saying what action it will take, but options could include allowing rivals such as TelstraClear and ihug access to Telecom's network, or structural separation of the company.

Competition issues could also force the stock lower. Vodafone has applied to the Commerce Commission for a ruling that will allow it to sell hybrid devices that transform from a fixed phone at home into a mobile outside. Mobiles have already been cutting into Telecom's fixed-line calling revenue.

If Vodafone's application is granted, Telecom's bread and butter would be further opened to poaching.

That revenue is also at risk from low-cost internet-based calling. A quick glance at global telco stocks shows underperformance by many in Europe, which not coincidentally is a hotbed of Skype use. With internet use expected to increase here, so are the number of Skype users.

An economic downturn and falling kiwi dollar could also propel the stock lower, although the extent of these two factors is difficult to predict.

On the plus side, some analysts still like Telecom's stock and say it's a good time to buy as it's sitting at a bargain price ($5.37 at its Thursday close).

Once the regulatory threat is dealt with and some certainty is established, Telecom does have some solid fundamentals and could rebound.

The company has a strong balance sheet and its shares still pay nice dividends. It recently announced a second-quarter dividend of 9.5c per share, as well as a special dividend of 5c.

The likely sale of its Australian AAPT unit this year could also net shareholders another special dividend.