Should you buy Telstra Corporation Ltd?

This dividend beauty has a lot to offer shareholders, but is it expensive?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares in Telstra Corporation Ltd (ASX: TLS) were up nicely yesterday. Widening our view the story gets even better. Telstra shares are up around 80% in the past three years alone, not including dividends.

So what's all the fuss about? Can our $67 billion telco behemoth continue to climb or is it fully valued at its current price? It's a complex and contentious question. If you ask a half-a-dozen analysts where they expect Telstra's stock to be in 12 months you'll probably get a dozen different answers.

However, a look at the important multiples paints a bleak picture of the telco's valuation at current market prices. For example, it trades on a forward P/E ratio of 16.5, PEG ratio of 3.19 and price to book ratio of 5.26!

But taking a backwards step and looking at the 'big picture' reveals some extremely promising macroeconomic tailwinds for Telstra's business. Firstly, Telstra is a safe, defensive company with an established marketplace and customer base. It generates huge cash flows and has the ability to pay generous fully franked dividends.

During a low interest rate environment, stocks such as Telstra are in high demand. With interest rates tipped by some forecasters to go lower in the near future, Telstra shares will be at the top of new investors' watchlists.

Longer term, the digital age is increasing demand for reliable wireless networks. Telstra already has the superior mobile network in Australia and recently announced a nationwide rollout of a Wi-Fi network. As a result, Telstra is in poll position to benefit from our increasing demand for networked devices (phones, televisions, household appliances etc.), machine-to-machine communication and wearable technology.

To buy, or not?

As the official interest rate drops, analysts' valuations of stocks such as Telstra, Commonwealth Bank of Australia (ASX: CBA), Rio Tinto Limited (ASX: RIO) and Woolworths Limited (ASX: WOW) increase significantly because the discount rate (aka risk weighting) applied to them reduces.

I believe if you're focused on the ultra-long term, Telstra shares have a strong upside at today's prices. However I would not be willing to pay more than $5.50 per share.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »