Should you buy Telstra?

Every investor should understand the principle of diversification and a balanced portfolio. I’m a firm believer you don’t have to do either religiously to be a successful investor, but you still need to appreciate their role in portfolio success.

For example, every share portfolio should have a number of ‘core’ stocks that make up the largest portion of your investment strategy. These stocks are generally safer, have a steady income, modest growth and brand recognition.

Telstra (ASX: TLS) is the perfect example.

Sure, you might get slightly more capital growth from smaller, up-and-comer telecommunications companies like TPG Telecom (ASX: TPM) and iiNET (ASX: IIN) but you won’t get the same dividend or a company that has a commanding market position. That makes Telstra a safer investment.

Telstra’s not devoid of growth either. Its International and National Application Services divisions are solid growth stories. Its strategic investments in healthcare is also promising. In the next 12 months, management have forecasted single-digit growth — perfect for a long-term core stock.

For income, it’s hard to go past Telstra as a dividend play. Its 28-cent payout alone is a sale point. However its growing cash flow makes a higher dividend likely in coming years. Morningstar are predicting management will be declaring a 32-cent return to shareholders by 2016.

Compared to the year of 2004, Telstra now returns 20% more revenue, has maintained an operating margin above 41%, net profit margin of 15% and has a return on equity of 30.2%. In comparison, Commonwealth Bank (ASX: CBA) has achieved a standout return on equity of only 17% — not nearly as good as Telstra’s.

Foolish takeaway

Telstra’s overseas expansion will be a big driver of growth moving forward, thus increasing the top and bottom line for shareholders. It’s dominance in the mobile and fixed internet markets will enable it to leverage its growth off its huge revenue base domestically — minimising the downside risks. In my opinion, long-term investors looking for a core stock that pays a great dividend can add Telstra to their portfolios today, the real question is: how much?

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

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