Better BUY: ANZ Banking Group Vs Telstra Corporation

ANZ Banking Group (ASX: ANZ) and Telstra Corporation (ASX: TLS) have more in common than most people realise. Each have aggressive Asian growth strategies, each pay a strong dividend, each are considered the best at what they do and each are iconic Australian brands.

But which one is the best buy now? First let’s first take a snapshot of each company.

Name Telstra Corporation Limited ANZ Banking Group Limited
Stock ticker ASX:TLS ASX:ANZ
Recent share price $5.27 $33.15
Market Cap $65.7 billion $90.9 billion
Price-Earnings Ratio | 10-year Average 17 | 13.3 14 | 12.4
Dividend Yield 5.3% 4.9%

Data sourced from Morningstar

As can be seen from the table above, both companies are currently trading above their 10-year average annual price-earnings ratio. However, as we know, higher price-earnings ratios, or P/E’s, are excusable if we believe more growth is on its way.

Taking a look at each companies’ 2014 interim results, Telstra is a clear winner. Although its net profit only rose by 7%, we’ve got to go beyond that result and ask why. In doing so, we can see that Telstra’s NAS (Network Application Services) and International divisions both grew at a rapid pace (increasing revenues by nearly 30%) and have set the benchmark for years to come.

On the other hand ANZ posted what appeared to be a superior result – growing cash profit by 11%. Although ANZ’s Asian strategy – like Telstra’s – is growing strongly, delving a little deeper we can see a number of alarming trends taking place. For example provisions for bad and doubtful debts dropped 12% (thus boosting half-yearly profit), the group’s net interest margin fell to just 2.15% and the amount of tier one capital also fell.

The lesson to take away from this example is to look beyond what the company’s want us to see and think independently. Although Telstra may appear more expensive, it is so for good reason. ANZ’s (like the rest of the big banks) results have been somewhat buoyed by a number of macroeconomic tailwinds and although it could be argued Telstra’s have too, it’s the eventual but inevitable headwinds of rising interest rates and bad debts which concern me.

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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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