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Are Telstra Corporation Ltd shares ridiculously cheap?

Credit: Telstra

Are Telstra Corporation Ltd (ASX: TLS) shares ridiculously cheap?

Following their lacklustre performance in 2016, some investors may think they represent good value.

Indeed, against the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), their valuation appears to have become more compelling.

Telstra Market (ASX 200)
Price-Earnings Ratio (P/E) 16x 16.7x
Dividend Yield 5.6% 4.2%
Price-Book Ratio (P/B) 4.8x 1.3x

As can be seen above, Telstra shares perhaps aren’t a bargain, at least relative to the market, due to their modest P/E discount and premium P/B ratio.

However, Telstra shares have many qualities that aren’t always captured by conventional valuation metrics. For example, Telstra’s dividend history is superb. The company has not lowered its payout once since 2006.

And while competitors like TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC) are bringing the fight to Telstra across a number of products, it continues to have excellent economics. Last year, Telstra generated a return on equity of 29%, which is very impressive.

Together with its tax-effective franking credits, it’s little wonder Telstra shares are valued equally, if not higher, than the market’s average company.

Buy, hold or sell?

At today’s prices of $5.50, I’m not a buyer of Telstra shares. Though interest rates are low and Telstra’s fully franked dividend yield is very compelling, I’d rather a lower entry point before buying shares, perhaps between $4 and $4.50.

Telstra is a good company but I'm looking for other -- faster growing -- shares to add to my portfolio, such as the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

Our resident dividend experts named this Top Dividend Share for 2016 because not only are the shares dirt cheap, the company is growing and trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card details required!

Motley Fool Contributor Owen Raszkiewicz has a financial interest in Vocus Communications. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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