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4 reasons why Telstra is a core stock

Telstra (ASX: TLS) is one of the most traded stocks on the ASX and makes up a huge 5.28% of the S&P/ASX 200 (ASX: XJO) (^AXJO).

It is a great stock for self-managed super funds (SMSFs) because it provides honest dividends, has modest growth, brand recognition and can be considered a stock with a high degree of safety. There are four key aspects that make the definition of ‘core’ stocks – ones that should contribute the largest part of your portfolio – but they may be more obvious than you may think.

  1. Brand recognition – Telstra’s dominance in the Australian telecommunications industry is unparalleled and the reputation for service is far more superior to many of its peers. This is only expected to increase as the company begins to focus on strengthening relationships through incentives for customer service satisfaction levels. This type of brand recognition also creates a barrier for competitors entering the market.
  2. Steady growth – Over the past five years, sales revenue has increased modestly. Total assets have also grown by 4.3% since 2008. In coming years, Telstra may look overseas for further growth or create a second ‘low-cost’ provider to increase its domestic market share.
  3. Profitability – In 2012, Telstra reported EBIT of $5,822 million for the full year and looks set to marginally increase that in 2013. It has maintained a return on average equity of just shy of 30% for the past five years and has grown its free cash flow by 34% over the same period.
  4. Regular dividends – Thanks to healthy balance sheets, the company has paid approximately $3.475 billion worth of dividends every year since it decided to pay a 28-cent fully franked return. Analysts believe this could likely go higher in coming years and Morningstar predicts a 1 cent annual increase over the next two years.

Foolish takeaway

Core stocks make up the bulk of any healthy portfolio. Diversifying allows investors to weather volatility caused by industry specific issues and take advantage of times when they are doing well. However, when buying blue chip stocks investors should be rewarded with healthy dividends since growth is usually not as rapid as for small or medium cap stocks. Telstra is a healthy long-term income stock that could fit into almost any portfolio.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: “Is It Time to Sell Telstra?”

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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