For defensive investors, stocks don't come much better than Telstra Corporation Ltd (ASX: TLS). However just like any investment, its imperative investors don't overpay for the right to have its shares in their portfolio.
At current prices, I'm not a buyer of Telstra shares, but if I did hold them in my portfolio, I probably wouldn't be in any rush to get rid of them. Here are three reasons why.
1. Cash flows, dividends and interest rates. Ok, so this may sound like more than one reason but hear me out. Telstra's dominant position in many of its product lines allows it to charge a premium to its rivals – like Optus – which enables it to generate great cash flows.
This gives management the ability to invest in the business and pay big dividends consistently. Currently shares trade on a forecast dividend yield of 5.5% fully franked. What's more thanks to RBA interest rates being stuck at just 2.5% (and some tipping they'll go lower), holding onto your shares for the long term for income purposes makes sense, provided you have a sufficient buffer on the current share price.
2. It sells non-discretionary items. Telstra is an established blue-chip company which sells a product people will be unlikely to forgo. Gone are the days when a broadband internet connection or mobile phone were just trendy, they are now essential parts of everyday life and during an economic setback, people are unlikely to go without them.
3. Modest growth. Telstra's sheer size makes it harder for management to grow the company at the blistering pace you'd expect from smaller telcos. However defensive investors would gladly give up the volatility often attributed to junior players in exchange for modestly growing revenues. Thanks to its expansion in Asia, the increase in machine-to-machine communication and ongoing growth in the Network Application Services (NAS) division, Telstra will likely grow its top line modestly for many years.
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