MENU

Stock cheat sheet: Telstra Corporation Ltd

Shares in telecommunications giant Telstra Corporation Ltd (ASX: TLS) have had a fantastic run over the past three years, returning in excess of 100%, when dividends are included. That compares to a 27% return from the S&P/ASX 200 Index (ASX: XJO) (INDEXASX: XJO).

However with shares in Telstra now trading at their highest level in more than 10 years, some investors have become concerned about its valuation and its ability to generate marking-beating returns. Here’s what you need to know.

Business Overview

Telstra is divided into six divisions with over half of all revenues coming from just two namely, Fixed and Mobiles. The Fixed division provides legacy services across the telco’s copper cable network and includes products such as home phones and internet services. In both divisions, Telstra enjoys extremely lucrative margins and a dominant market share.

Two other divisions which are worthy of noting are the Network Application Services (NAS) and International divisions. Each will be key grow areas for Telstra in coming years.

Looking ahead

Telstra is in a state of transformation. From a heavy infrastructure business, it is becoming a more agile technology and telecommunications company. With the sale of its copper cable network to the government’s NBN Co, partial sale of its Sensis media business and a firm focus on Asia, it is cashed up and beginning to move into the emerging technologies of tomorrow. Cloud computing, digital media, wireless networks and linked devices each present unique opportunities for the telco to pursue in coming years, both locally and abroad.

Valuation                                                 

Telstra shares currently change hands on a trailing price-earnings ratio of nearly 18, a PEG ratio of 3.7 and price book ratio of 5.42. Despite the possibility of falling interest rates and a forecast 5.3% dividend yield, from a long-term investor’s perspective, Telstra simply does not stand out as a good buy at current prices.

Our 7% dividend stock idea – Free!

The stock market is full with great dividend stocks ideas like Telstra but its vital investors focus on more than dividend alone. If investors overpay for a stock, we greatly increase our chances of losing more than the forecast dividend yield. Currently, I rate Telstra as a hold.

However, it's not all bad news! Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. And he recently found one ultra-promising growth stock with a 7% grossed up dividend. He recently dubbed this ultra-promising small-cap, "The Motley Fool's Top Dividend Stock For 2014 - 2015" Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.