At today's price of $5.69, those holding Telstra Corporation Ltd (ASX: TLS) shares in their portfolios have been excellently rewarded over the past three years. Not only has the share price gone up a whopping 86%, but the telco giant has also paid out dividends equivalent to 27.5% of the original share price (not including franking credits).
Therefore an investment in Telstra has returned, in just over three years, in excess of 113%! An awesome three-year return for any blue-chip stock. For comparison the S&P/ASX200 Index (INDEXASX: XJO) is up 34%.
So by now, investors would be wondering if it can keep going and possibly even reach $6.00 per share before 2015. Here are three reasons why it could trade above $6.00 in the near future.
- Interest rates are low. The official cash rate is just 2.5% while inflation is 3%, so unless you're earning more than 3% per annum on your money, you're losing purchasing power! Therefore blue-chip stocks with fully franked dividend yields greater than 5% will continue to be in high demand.
- Telstra's business quality is second to none. Telstra dominates telecommunications markets. From mobiles to fixed broadband and pay-tv, it's got it all. Its superior network and bundling capabilities allow it to boast huge profitability margins which in turn provides it with enormous free cash flows and the opportunity to pay out bigger dividends. In FY14, it had a return on equity of 32.3%.
- It's in a growing industry. Unlike some other blue-chip stocks, such as Woolworths Limited (ASX: WOW), the market in which Telstra operates has a very bright future ahead. Machine-to-machine communication, growth in Asia and massive Wi-Fi networks are just some of the exciting trends facing the industry.
A better dividend stock than Telstra – Yours FREE!
The future is very bright for Telstra (and its shareholders) and I would not be surprised to see its share price reach $6 by the end of the year, however I feel the stock is trading well above fair value and investors should seek a lower entry price point before committing to a purchase. In the meantime, income-hungry investors should look towards other high-yielding stocks with cheaper price tags.
