Telstra Corporation Ltd (ASX: TLS), Australia's largest telecommunication provider has recently given investors every reason to smile. Its shares have gained about 102% in the past three years, sugar coated with a 5.2% fully franked dividend yield. But if you're a long-term investor like me, you can't help but notice that Telstra is trading at 10-year highs. So does this signal some turbulence ahead for the giant?
The hardest part of investing is paying the right price for a company. The company may seem to have it all, but if it isn't priced to buy, then investors realise little capital gains and even take on extra risk.
In the case of Telstra, there are some confusing signals present with regards to its valuation, which may mislead investors. On one hand, it sits on some unappealing valuation fundamentals, but on the other hand, it provides some solid long-term macroeconomic tailwinds that could help realise some serious gain in the future.
The world's reliance on smartphones and internet related services is increasing exponentially and devices are becoming increasingly complex with cloud computing and wearable devices requiring a faster, more reliable internet connection. Telstra's recently founded Network and Application division, provides business customers solutions for these new technologies. In its latest interim report, revenues in this division had grown a solid 29.3%, with plenty more growth potential still available as Telstra continues to take advantage of technological advances.
Telstra has also widened its revenue base by expanding into high-growth Asian economies such as China and Indonesia, to target Asia's middle class. This creates a very exciting growth prospect for Telstra and has the potential to fuel its future earnings as many Asian countries continue to grow comfortably. Telstra CEO, David Thodey, remains optimistic about the expansion and has forecast Telstra to generate a third of its revenues from Asia by 2020.
Is Telstra priced to buy?
As exciting as these growth prospects may seem, most of Telstra's fundamental multiples reveal a fully valued share price. Although Telstra does sit on a modest price-to-earnings ratio of 17, its price-to-growth and price-to-book ratios of 3.25 and 5.36 respectively, don't seem to be very attractive at all.
I think Telstra is a better bet than other blue-chips like Wesfarmers for providing some sweet dividends at a lower risk. No matter how bad the economy gets, we will still have to rely on our mobile phones and the internet. In our historically low interest rate environment, Telstra's juicy 5.2% dividend yield also serves as a relief for investors.
But when looking at the bigger picture, Telstra's growth prospects seems to be neutralized by its relatively expensive price and investors must be willing to trade off higher yields for a loss of capital gains if they want some of Telstra's added "safety".
