2014 has been a good year for Telstra Corporation Ltd (ASX: TLS).
As I write, its share price is up 8.1% since January 2, compared to a lousy 1% return from the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO).
| Share price at market open, January 2 2014 | Grossed-up dividends paid (cents per share)1 | Recent share price | Total Return | |
| Telstra (without dividends) | $5.26 | $5.69 | 8.17% | |
| Telstra (with dividends) | $5.26 | 42.14 | $5.69 | 16.09% |
| S&P/ASX 200 | 5352.2 | 5402.1 | 0.9% |
Source: Google Finance; 1asx website
However including its 29.5 cents per share dividend (grossed-up) Telstra's 2014 return blows out to 16.08%. A great return by anyone's measure.
Especially when we consider the returns on offer from other assets classes. For example, term deposits are offering interest rates as low as 2.5% per annum, whilst inflation is a juicy 3%.
2015 and beyond
Given the tremendous share price rise of Telstra since 2012, management's outlook and its current valuation, 2015 isn't likely to be a mirror image of this year's performance.
Indeed, we'll witness an increase in earnings per share as a result of the recent share buyback. Further, management expect its trend of mobile growth to continue and have set guidance for a slight increase in EBITDA throughout 2015.
Currently trading at over 15 times earnings per share (after the $1 billion buyback) and price-book ratio of 5.1, compared to the market's average of 15 and 1.2, respectively, Telstra appears fairly valued.
Personally, I believe fair value is closer to $5.00 per share but wouldn't be prepared to buy until its price falls to around $4.00.
In 2015, shareholders can expect a dividend of 30 cents per share, fully franked.
Buy, Hold, or Sell?
Given its modest growth outlook and relatively high valuation at today's market price, I find it hard to believe it'll outperform the market in 2015, the same way it did in 2014. However with interest rates so low, more money will be moving out of safer assets like cash and into the local share market in search of stable income stocks such as Telstra. This demand should put a floor on its price at some point.
So for new money entering the market, it might be wise to steer clear of Telstra shares. But for shareholders who bought in at a lower level and presumably have a healthy buffer on the current market price, it might be worth holding onto your shares for those juicy fully franked dividends.
