Within 20 minutes of the market open this morning, more than 1.5 million shares in Telstra Corporation Ltd (ASX: TLS) had changed hands. The amount of trading is unsurprising given Telstra’s popularity and near 5% contribution to the S&P/ASX200 Index (ASX: XJO) (INDEX: ^AXJO), but what is surprising is that so many investors are willing to sell its stock, whilst it still has so much to offer.
Here are five reasons why I think Telstra is a compelling long-term buy.
1. Our use of telecommunications services is growing. Unlike Ten Network Holdings Limited’s (ASX: TEN) free-to-air programming or Fairfax Media Limited’s (ASX: FXJ) newspapers, our use of Telstra’s numerous telecommunications products and services is only growing. Cloud computing, mobile data, wearable technology, smart appliances and other machine-to-machine technology all require a network which is fast and readily available. Telstra is in poll position to benefit from this trend.
2. Telstra can be considered a ‘safe’ stock. Telstra has a dominant customer base across a number of products. Many of said products are now considered to be non-discretionary. Meaning, they are now required in our everyday lives. Telstra can now be considered alongside the two supermarket giants, namely Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) because even in a recession, we’ll still be using the internet and mobile phones as much as we do today.
3. It has enviable profit margins. Telstra charges a premium for its services but customers get a superior service in terms of reliability, speed and coverage. It has an extensive wireless network which enables the telco to generate huge EBITDA margins and cash flows. It has the greatest return on equity (30.2%) of any listed Australian company with a market capitalisation greater than $33 billion.
4. A 5.4% dividend. With enormous cash flows, Telstra has a healthy interest cover and manageable gearing, enabling it to pay a juicy dividend yield. It is forecast to pay a dividend equivalent to 5.4% (fully franked) of its market price in the next year.
5. A solid long-term growth profile. Unlike some ASX blue-chips which trade on high share prices, Telstra deserves its current price given its ultra-long growth strategy and macroeconomic tailwinds. With a keen focus on Asia and growing revenues from its Network Applications Services division locally, Telstra can be expected to grow earnings per share in coming years.
To buy, or not?
Telstra presents itself as a compelling long-term investment, even at current prices. With a generous dividend yield and modest growth, it should be held as a core stock in your portfolio.