It's been a rather muted year for investors in Telstra Corporation Ltd (ASX: TLS), with shares in the telecommunications giant largely tracking the ASX since the turn of the year. Indeed, Telstra is now up 3.5% year-to-date, while the ASX has made gains of 2% over the same time period.
With there being a number of high-growth stocks available at reasonable valuations, investors in Telstra would be forgiven for thinking of selling their shares in favour of a more exciting alternative. However, Telstra could be worth hanging on to and may turn out to be a top performer in the long run. Here's why.
Long-term potential
Although Telstra is expected to report earnings that are somewhat lower this year than they were last year, the company has impressive long term potential. So, while EPS is forecast to be 11.8% lower year-on-year, investors should not give up on bottom-line growth.
That's because Telstra is currently undergoing a transitional period that involves numerous changes to its business model. The most obvious of these is the NBN taking over Telstra's cable network, which means that the company will be forced to compete with a number of smaller outfits. Although this will inevitably mean a fall in Telstra's market share, the fees received from the NBN should help to lessen the impact.
Furthermore, as stated in the recent update from the company, Telstra is aiming to increase its footprint in Asia. In fact its goal is to have around a third of all revenue generated in Asia within five years. This highlights the ambition of the firm, as well as the potential for it to grow its top and bottom lines in areas outside of Australia. This, in addition to its strong showing in the mobile phone space, could help to move profits upwards.
Income potential
Although the lack of earnings growth in the short run is set to hamper dividend per share growth, Telstra continues to be a top income play. That's because it currently yields a fat, fully franked yield of 5.5%. This is well ahead of the Aussie interest rate of 2.5% and beats the ASX's yield of 4.6%.
Valuation
Although Telstra is not exactly cheap right now, there is at least some scope for an upward revision to its rating. That's because shares in the company currently trade on a price to earnings (P/E) ratio of 14.6, which is below the ASX's P/E of 15.7.
While it may take a little while for investors to start to see the long-term potential of the business translated into short-term earnings growth, the current rating seems to offer generous upside. Indeed, it could be argued that as a result of its long-term growth potential and high yield, as well as its dominant position in Aussie telecoms, Telstra could actually deserve to trade at a premium, rather than a discount, to the wider index.
