3 reasons Telstra Corporation Ltd shares could be a bargain

Free cash flow, increased dividends and an expansion into Asia could make Telstra ripe for the picking.

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Fact: Many of Australia’s biggest companies are not cheap.

The companies which make up the S&P/ASX200 Index (ASX: XJO) (^AXJO) are trading, on average, 26% higher since March 2012. I’ll admit, there is a chance they were significantly undervalued and still represent a good ‘buy’ or they were a bargain and now they’re not. One thing is for sure: They are now more expensive.

That’s not to say we can’t find any companies trading at a bargain. We can. We’ll just have to work harder. However we may not have to go far to find a bargain.

One example could be Telstra Corporation Ltd (ASX: TLS). Although it currently trades around $5.00 per share, it wasn’t that long ago when analysts were expecting it to rise to $6.00 per share.

1. Growing dividends

One reason it could easily go higher is its growing dividend, which is expected to reach 29 cents per share fully franked in 2014. That puts it on a forecast yield of 5.7% plus full franking, outperforming any term deposit I know of.

2. Cashflow

The reason it can afford to pay out bigger dividends is due to its rising free cash flow. In the past 12 months, management have signed off on a number of asset sales which enabled the telco to pocket a tidy profit. The funds have been, and will be, used to undertake capital management incentives such as paying down debt, increasing the dividend and possibly buying shares.

3. Overseas exposure

Another place the cash will likely go is into targeted overseas markets such as Indonesia and China where Telstra’s presence is rapidly growing. The international business grew revenues by 28.3% in its most recent half-year and, combined with the rapidly growing Network Application Services division, makes up approximately 15% of all revenues.

BBY telecommunications analyst Mark McDonnell was quoted in The Sydney Morning Herald as saying, “I think [NAS and international] will be even more meaningful contributors going forward, partly because of their own growth, but also partly because the reshaping of the business, with exiting Sensis and exiting CSL.”

Foolish takeaway

Lowering debt, rising dividends and growing revenues all bode well for Telstra shareholders. Only time will tell if the current price represents a bargain. But one thing’s for sure, it’s hard to go past Telstra for safety and income.

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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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