Last week, Telstra Corporation Ltd (ASX: TLS) paid its biggest dividend in over 14 years. A juicy fully franked payment of 15 cents per share.
After it went ex-dividend shares dropped (as expected), but have since recovered to trade at $5.70 per share today – only the second time it has done so since June 2001.
But with shares trading at these high levels, is the market expecting too much from the telco giant?
I think so…
Currently, shares trade on a price to book value of 5.10 and PEG ratio of 10. Those numbers alone would be enough to scare value investors away.
However, given Telstra is transitioning itself away from an infrastructure heavy business to a more agile telecommunications company, it's probably not fair to use a price to book ratio to get a sense of its valuation.
Telstra does have a number of competitive advantages in the domestic telecommunications market which affords it extremely healthy cash flows and the ability to pay big dividends. Its trailing dividend yield is equivalent to 5.17% fully franked.
However with Telstra shares currently trading on a price to cash flow ratio over 8 and the company itself only forecasting, "low single-digit income and EBITDA growth" in FY15, it doesn't appear to be great value.
Buy, Hold or Sell?
I believe Telstra is an excellent dividend stock to hold, given its ongoing dominance in domestic telecommunications and long-term growth potential of the International and Network Application Services (NAS) division. However, after rising over 80% in the past three years, I don't think its current price offers potential investors a big enough margin of safety.
