"Price is what you pay, value is what you get." – Warren E Buffett.
For anyone looking to invest for the long term, it's vital we remind ourselves share markets are merely a place for us to buy part of a company…
To inexperienced individuals, the share market is often perceived as gambling. But the only real difference between it and the housing market is liquidity.
For example in the past 20 days, 504 million shares of Telstra Corporation Ltd (ASX: TLS) have been traded. By comparison, less than 50,000 houses have sold at auction in Melbourne and Sydney in 2014 combined.
People see the prices of their shares rise and fall each day and lose their temperament. In the process forgetting that they still hold the same 'piece' of the company. As Warren Buffett says, there's a difference between price and value.
3 reasons to Hold or Sell Telstra Corporation
Telstra is a stock held by many Australian investors, for many different reasons. However, as I'll show you in just a minute, the chance to buy in cheap has passed us by.
1. Its share price has risen 79% in five years whilst earnings per share are up 1.5%. Telstra's share price has nearly doubled since the GFC but its earnings per share performance has been underwhelming. Its P/E ratio has gone from 10 to 16. Its fully franked dividend yield has diminished from 8.4% to 5.13%. Currently trading at $5.76 per share, I believe a great price to pay is around $4.00.
2. Growth will be modest for the foreseeable future. Modest top line growth is a great thing for long-term investors because it's usually sustainable. For existing shareholders, that's a big tick and will provide some earnings per share growth in the years ahead. However for potential investors, paying 16 times profit and 8.35 times cash flow is too much, in my opinion, for just low-single digit income growth.
3. Dividends in a low interest rate environment. Although Telstra's dividend yield has fallen considerably in recent years, investors who bought shares at a lower price than today's will likely be sitting on a grossed-up yield in excess of 8%. When term deposits are offering just 2.5%, a fully franked dividend over 5% is fantastic. With strong cash flows and profit margins, its payout is unlikely to come under pressure in the foreseeable future.
Hold or Sell?
At any time, there's a difference between price and value. But at some point Mr Market offers us much more than what we believe an investment is really worth. Indeed, if I planned to be invested in shares for many years (i.e. five years or more), then I'd continue holding Telstra, provided I bought well below $5 per share. However for investors not willing to go the distance and experience the market's vicissitudes at their fullest, then it might be time to start taking some profits off the table.
