Telstra (ASX: TLS) is at the center of technical innovation and will have a huge part to play in a future fuelled by the internet, mobile devices, advertising and business solutions. So why has the stock fallen in recent months and it a cause for concern?
The last two years have been extremely successful for Telstra shareholders and others in the industry. Since early 2011, when the share price was around $2.70, the value of the stock almost doubled. However, in May the company reached a five-year high that was unsustainable based on current earnings.
Despite reporting a healthy rise in NPAT of almost 9% for the first half of FY2012, investors have been selling their long-held shares for cushy capital gains. We're likely to see a sell-off of many blue chips that have seen solid gains over the past 12 months as investors begin a new tax period and may look for other places to park their funds.
However, Telstra stands to be a major beneficiary of the NBNCo's new fibre optic network and will begin to transition customers away from its existing copper networks in the near future. This will help both business and retail clients to access faster internet speeds, increase their usage and look for new network solutions.
Don't panic
Telstra's alluring dividend will drive up share prices but it will also keep a healthy buffer on it. Particularly when interest rates are so low, investors seeking less risk and high income buy blue chips that pay handsome returns. At current prices, Telstra's dividend is around 6% fully franked (try getting that at a bank).
Telstra's biggest competitors in the industry comes from Vodafone, owned by Hutchison Telecommunications Australia (ASX: HTA) and Optus, owned by Singapore Telecommunications (ASX: SGT), but neither offer the dividend nor safety that Telstra does. Vodafone has had numerous problems with its carriers and has only now turned on its 4G network, while Optus has already purchased equipment enabling it to have a multi-frequency 4G signal but operates at a higher P/E with less income and a market cap of only $607 million.
Foolish takeaway
The ASX has provided investors with many companies that are vying for a spot in their portfolios. Telstra has the best dividend, the biggest market capitalisation, dominance in the industry and healthy prospects for the future. Every cent that Telstra shares drop only increases the dividend yield and future prospects, so keep an eye on it because it might just become too much of a bargain to pass up.
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More reading
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- ACCC takes aim at Telstra
- 10 of the ASX's best dividend plays
- 5 stocks drive ASX higher in 2013
Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
