Is Telstra Corporation Ltd really worth $7 a share?

Shareholders in Telstra Corporation Ltd (ASX:TLS) could enjoy a hefty dividend and nearly 10% share price upside.

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The share price of Telstra Corporation Ltd (ASX: TLS) is currently at $6.39 which is below the stock's 52-week high of $6.74 set back in early February. With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) soaring around 1.3% higher in early trade today, investors will be pondering whether Telstra will re-test its highs shortly…

One leading financial commentator, Charlie Aitken, suspects that not only will the stock re-test those February highs at some point but in his view the stock is headed for $7 a share!

Aitken writes a regular note to clients and back in January he reminded investors that one of his high conviction ideas was to be overweight Telstra noting that "it has dividend growth, positive earnings revision, regulatory certainty, pricing power, excess capital and massive grossed up yield advantage to any duration of Australian government bond."

The $7 price target (PT) is based on the government bond rate which is at an all-time low and according to most pundits, headed lower. The incredibly low returns available on cash obviously make equities a more appealing asset class and Aitken justifies the PT based on investors bidding down Telstra's yield.

In other words, Telstra's current fully franked dividend yield is so attractive that investors will continue to bid the stock price higher until the yield contracts to a smaller premium compared with the bond rate.

Alternatives to Telstra

A primary reason for Telstra's popularity is, in Aitken's words, it is equity "with bond like characteristics."

Given the defensiveness and stability of Telstra's earnings and hence dividends, the stock is an obvious choice for investors, particularly those running self-managed super funds (SMSFs).

There are however other blue-chip stocks which arguably offer similar "bond like characteristics" to investors and given the current market volatility, on any particular day they could be more appealing investment opportunities than Telstra. For this reason, it's important that investors keep a watch list on potential candidates and weigh up the pros and cons of one versus the other –  those watch list stocks could include Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.​  

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