When it comes to defensive businesses, Telstra Corporation Ltd (ASX: TLS) is one of Australia’s best.
With huge profit margins, it can generate reliable cash flows and take on debt with ease. This in turn provides massive returns on equity and allows it to pay a generous fully franked dividend.
Indeed in the coming year it is expected the telco will pay a fully franked dividend of 30 cents per share. Equivalent to a yield of 5.5%, or 7.8% grossed-up.
Telstra can sustain a high level of debt and continue to pay out a great dividend because it has a wide economic moat. In recent times its competitive advantages have allowed it to dominate many non-discretionary and discretionary product lines, making future cash flows highly predictable.
It is the leader in technologies such as fixed voice and data, mobiles and pay-tv but it’s also adapting to the changing landscape by investing in areas such as eHealth, machine-to-machine communication, cloud computing and unified communications.
In addition, by 2020 it has a goal of deriving one third of revenues from Asian markets. It’ll do this by partnering with established telecommunications companies, expanding its data centre network and undersea cables, as well as growing its exposure to consumer technologies. Such as its recently-listed Chinese online automotive website, Autohome (NYSE: ATHM).
Buy, Hold, or Sell
Unfortunately for new investors, the market already knows just how good Telstra is and has priced the stock accordingly. In the low interest rate environment, it’s easy to see why. As such I probably wouldn’t buy Telstra shares for anything more than $4.70.
Forget Telstra, this tech stock is still a great buy…
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