It’s not every day you get to hear the words “safe” and “stockmarket” in the same sentence. However I think this time it’s warranted because Telstra Corporation Ltd (ASX: TLS) has made strides towards giving investors the things they really want. As such, I believe, it’s now become one of the safest companies on the Australian stockmarket.
No longer does it pay dividends from burgeoning debt or stand in the shadow of its former state-run self. Telstra has become a leaner, more efficient manager of investors’ hard earned cash. Since CEO David Thodey took the company’s top job in 2009 its return on capital and operating margins have remained consistent, but its share price has climbed over 50%.
Here are the three undeniable reasons why Telstra shares might be right for your portfolio today!
With margins that put Wesfarmers Ltd (ASX: WES) and Commonwealth Bank of Australia (ASX: CBA) to shame, Telstra’s dominance in a number of industries affords it a hefty degree of safety. Outside of mining not many companies can consistently deliver a return on equity above 30%, Telstra has done just that for five of the past six years.
Telstra’s huge margins allow it to maintain excellent cash flows and pay great dividends. For example, it has a price-to-cash-flow ratio of just 7.7 (which is very good), whilst supermarket giant Woolworths Limited’s (ASX: WOW) number is 17. Therefore, with profit growing each year, long-term investors can expect dividends to increase in line with earnings.
Telstra’s International and Network Application Services (NAS) divisions are booming. Management’s ability to recognise both economic and technological trends has, and will continue, to serve shareholders well in the long-run. In the first half of the 2014 financial year, both divisions racked up revenue growth of nearly 30% compared to the prior corresponding period. This accounted for just 14.8% of revenues, but I anticipate their contribution to grow rapidly in coming years.
For long-term investors asking themselves if now is the right time to buy Telstra I believe the answer is yes. If you’re looking for stable returns, a great dividend and modest earnings growth in the long term then it shouldn’t be a question of timing but volume (i.e. how much should I buy?).