Telstra Corporation Ltd (ASX: TLS) has a yield of 6%. Although lower than the 6.3% yields of ASX peers Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ), Telstra's yield is 180 basis points higher than that of the ASX. However, it is Telstra's scope to raise dividends over the long term which makes it a worthwhile income buy in my view.
Customer loyalty
Telstra is focused on improving customer retention and boosting customer loyalty. This is a sound strategy since it could mean higher margins in the long run. However, its progress on this front has been disappointing. For example, in the second half of the 2016 financial year it experienced network disruptions and they contributed to a fall in the company's overall Net Promoter System (NPS) score of four points year on year.
However, Telstra has the scope to turn this around in my view through a range of changes which are being made to improve customer advocacy. For example, Telstra has removed a number of legacy processes and practices to make customer interaction easier, it has invested $4 billion in its network to ensure 99% 4G population coverage by June 2017, while its Wi-Fi network has over 500,000 hotspots nationally.
New growth areas
Telstra's move into ehealth solutions diversifies its business and reduces its risk profile. It also provides long term growth potential for dividends in my view. That's because of favourable demographics within the healthcare sector as well as a rising trend in the digitisation of healthcare services.
For example, the population is increasing, becoming older and chronic illnesses are more prevalent. Telstra's ehealth division is a dominant player in the ehealth solutions space. Its 18 health-related companies including Health IQ and Comcare provide improved efficiencies, higher productivity levels and better quality healthcare through the provision of services such as ReadyCare. This is where GP consultations are performed by videophone and the practice will become increasingly popular over the long term for non-emergency requirements in my view.
New growth geographies
Telstra's goal is to derive a third of its revenue from Asia by 2020. Its investment in Pacnet has allowed it to emerge as a dominant player in international connectivity. It has the largest integrated data centre footprint in the region as well as the largest submarine cable network in the Asia Pacific region.
Industry analyst Gartner rates Telstra as the industry leader for high capacity and low latency networks in Asia. Further investment in the region will take place. Telstra's cash flow provides the scope to do this on a large scale. The company had free cash flow of $3.9 billion even after capex of over $4 billion in financial year 2016. Further, its net debt to equity ratio of 86% and interest coverage ratio of 7.9 indicate that additional leverage could be used to fund growth in its international operations.
Outlook
Due to Telstra's growth prospects in new spaces and in new geographies, as well as its increased focus on customer loyalty, I believe that its dividend growth outlook is positive. Alongside a high yield, this makes Telstra a worthwhile income play for the long term.
