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Should you buy Telstra?

Australia’s S&P/ASX 200 Index (ASX: XJO) (^AXJO) has risen well in the past two years, despite a hugely uncertain economic environment worldwide.

The growth of some major Asian economies is beginning to plateau (albeit from a larger base) and the West is taking on mountains of debt. Even treasurer Joe Hockey says the Australian economy has a big mountain to climb before we start to see a return to surplus.

So, in essence, we’ve got the foundations of the current bull market being held high by a shaky global economic outlook leading into 2014. “We expect growth around the world will remain sluggish in 2014,” BlackRock Investment Institute chief investment strategist Ewen Cameron Watt was quoted as saying in The Australian Financial Review. Although that may paint a bleak picture for the near future, the medium to long term is looking much brighter.

Evidence of poor confidence levels in 2013 has been apparent for some time. We’ve seen stocks like Commonwealth Bank (ASX: CBA), NAB (ASX: NAB) and Macquarie Group (ASX: MQG) fly higher thanks to their high dividend yields – a demand which was spurred on by poor economic growth which resulted in low interest rates. In 2014, it seems the RBA’s easing bias won’t push interest rates significantly lower unless the Aussie dollar remains resiliently high.

Therefore I expect stocks like Telstra (ASX: TLS) and the banks – who are bought for their perceived level of safety – to maintain their high share prices.

A dividend idea

Telstra’s product offering and commanding lead in the Australian mobile and fixed internet markets has historically been resented by customers who had no other choice but to accept poor levels of customer service and bill shock. However CEO David Thodey’s customer focused strategy has enabled the giant telco to maintain and improve its market share of both major product groups – therefore locking in revenues in the long term.

Company complaints to the Telecommunications Industry Ombudsman have fallen for a third consecutive year.

In 2014 Telstra is forecast to record single-digit profit growth and I’m expecting the full-year dividend to increase to 29 cents per share. Enabling it to uphold its current share price in a low interest rate environment.

Although Telstra’s copper networks are being sold (again) to the NBN Co it’s not a bad thing for shareholders, regardless of the infrastructures history of high margins and earnings potential, fixed internet and phone lines will be made redundant in years to come. Telstra’s mobile phones and wireless devices will cannibalise its legacy systems – although I’ll concede that won’t happen as early as 2014.

Telstra’s debt is now manageable and despite its Sensis business failing, many Australian investors wouldn’t be aware of the huge success of the company overseas. For example, in Hong Kong Telstra is expanding rapidly and has 3.9 million customers, and in China its Autohome (NYSE: ATHM) business (the leading website for automobile sales) recently listed on the New York Stock Exchange for US$17 per share which valued the company at US$1.634 billion, however after a 76% jump on its NYSE debut, Autohome is now worth $3 billion. Telstra owns 66.2% of Autohome.

Foolish Takeaway

Spurred on by a low interest environment and bleak economic outlook, Telstra shares look set to move through 2014 with minimal downside risk. Any significant pull back in its share price would be an opportunity for savvy investors to jump aboard and take advantage of the company’s 5.7% fully franked dividend and modest growth.

Still not convinced? 

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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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