Telstra Corporation Ltd (ASX: TLS) is legendary for its dividend which, until very recently, has been a generous 28 cents fully franked.
Since around late 2010, investors had scoffed at the idea of Telstra as a 'safe' and secure way to invest in the stock market. Over the years, it lacked any material growth prospects and debt ballooned from $9 billion in 2004 to $15.3 billion in 2009.
Now, after a strong rally pushed it back above $5 per share, Telstra is the market darling with a number of clear growth prospects and a juicy 5.6% fully franked dividend yield.
A lucrative legacy
Tesltra's new image is a result of its rebranded management philosophy. It is currently in transformation, shifting away from its legacy systems to a more nimble technology-focused telecommunications company. Despite the apparent attractiveness of the move, it has concerned some shareholders.
Following its deal with the government's NBN Co to sell its 100-year-old copper cable for around $11 billion, shareholders have become worried the company will not be able to emulate the same profit margins on its new businesses. These include network applications, mobiles and a portfolio of international assets.
However, it's important to note Telstra got a very good deal for its outdated assets and the timing (for management and shareholders) couldn't have been better. 10 years from now no one will use copper networks and very few premises will have a DSL Internet connection. Telstra has been paid billions of dollars for a bygone and soon-to-be obsolete technology.
In its mobiles division, Telstra has a commanding lead over its peers Optus – owned by Singapore Telecommunications Ltd (ASX: SGT) – and Vodafone, which is part-owned by Hutchison Telecommunications Ltd (ASX: HTA). Despite its dominance, Telstra continues to add customers and is experiencing rapid growth in mobile downloads. For the half-year to 31 December 2013, mobile services revenue climbed 7.3%. The business has a huge EBITDA margin of 39%.
Telstra's Fixed business – which includes its copper network for home phone and broadband services – also controls the lion's share of the market, over rivals TPG Telecom Limited (ASX: TPM) and iiNET Limited (ASX: IIN). Despite competition and the threat from mobile, the business continues to perform well with the total number of bundled customers now at 1.7 million.
The telco's biggest growth areas include its Network Application Services division, or NAS, and International. Respectively, their profits were up 29.3% and 28.3% in the most recent six-month reporting period. NAS continues to be boosted by Cloud, unified communications and managed network services (very big growth areas), while its international division includes network partnerships with corporations and its Autohome Inc (NYSE: ATHM) assets in China.
Foolish takeaway
With domestic businesses growing strongly and increasing cash flows, Telstra's dividend is likely to continue growing. It complements its big payout with strong, long-term growth prospects, including its international and NAS businesses which should enable the company to continue growing revenues in the near future. It's hard to go past Telstra for dividends, safety, and exposure to booming Asian markets.
