At $5.22, shares in Telstra Corporation Ltd (ASX: TLS) have drifted sideways since the beginning of 2014, despite investors' continuous demand for high dividend yields and the relative safety of blue-chip stocks. So could now be the time to up your holding or even add it to your long-term portfolio?
Here are three reasons why Telstra could be a great long-term buy and hold investment.
1. A big fish in a small pond. Telstra's ongoing dominance in mobile, fixed internet and networking, enables it to have a stranglehold on a huge market share of customers as well as its domestic competitors, such as Optus – owned by Singapore Telecommunications Group (ASX: SGT) and iiNET Limited (ASX: IIN). This creates huge cash flows for the telco behemoth and affords it the opportunity to invest heavily in new technologies such as Cloud Computing and Unified Communications (two booming growth areas).
2. A generous (and growing) dividend yield. In addition to ongoing investment in new technologies, Telstra's free cash flow gives it options. From a capital management perspective that can mean paying down debt, buying back shares (increasing their value) or distributing a higher dividend. With an expected 29 cent per share full-year payout, it trades on a forecast yield of 5.5% fully franked. With higher earnings and ongoing payments from the government, analysts believe the dividend payout could grow to over 30 cents per share in the near future.
3. Asia. Recently, Telstra's CEO David Thodey said he'd like the company to draw a third of its earnings from Asia by 2020. Whilst some might say it sounds risky and ambitious it could, if executed successfully, provide a significant amount of earnings per share growth in the coming decade.
To buy, or not?
Trading on a forward P/E ratio of around 16 and price-book ratio of 5.1, Telstra's shares don't appear cheap. However with a focus on the long term, investors could realise significant value in the form of both dividend and earnings per share growth.
