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3 things to consider before buying shares in Telstra Corporation Ltd

Source: Telstra presentation

Along with mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO)Telstra Corporation Ltd (ASX: TLS) is one of the most recognised companies on the ASX.

This is because a huge number of Australians use the company’s products every day, and as a result it’s one of the first shares they look at when they start investing. Telstra shares shouldn’t be an automatic buy for every investor, however.

Here are three things you need to consider before buying Telstra (or any other dividend share):

  1. Is the dividend sustainable?

There’s no point buying Telstra for its 5.4% yield if the company is either spending more than it earns, or under-investing in its network and growth opportunities – both situations would leave shareholders high and dry in the future. Fortunately, as I wrote here, Telstra’s dividend appears highly sustainable.

  1. How is the business performing?

Telstra carries a whopping $17 billion dollars in debt – and this is slightly below management’s target range of how much debt they think the company should have. Those numbers alone shouldn’t be enough to turn investors off, because they’re underpinned by a dominant business which permits the company a low cost of debt and high levels of indebtedness.

Investors do need to be aware of competition from the likes of Vocus Communications Limited (ASX: VOC), and TPG Telecom Ltd (ASX: TPM) over the long term, both of which are growing large enough to give them significant market power. Needless to say, a decline in business conditions would lead to pressure on Telstra’s otherwise sustainable dividend.

  1. Why am I buying it/ is there a better opportunity?

If your goal is sustainable dividends, defensive earnings, and potentially some growth, then Telstra might be for you. As the biggest company in a mature market however, its growth prospects are limited and vulnerable to competitors. If you’re buying the company because it’s Telstra and you use Telstra products, well, there might be a wide variety of better investments out there.

For example, if you're chasing growth, high quality businesses, or both, then you should consider The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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