Investors could be excused for thinking Telstra Corporation Ltd (ASX: TLS) is truly the bluest of all blue-chips thanks to the stellar share price performance of the telecommunications giant over the past few years.
In fact, despite its enormous size Telstra's share price performance has managed to outperform the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by 20% and 75.5% over the past one and five years respectively!
Calling Telstra – 'the bluest' – could in many ways be a correct assumption considering the stability of the group's dividend and reliability of its cash flows. There is a problem for Telstra however, and indeed one which is shared by a number of its blue-chip peers including Woolworths Limited (ASX: WOW) – limited growth options.
The problem facing many of these industry leaders is that organic growth rates are low – this challenge often leads boards and management teams to chase inorganic growth via acquisition. In Woolworths' case this has led them into the seemingly dangerous decision to take on the Wesfarmers Ltd (ASX: WES) owned Bunnings, which has so far led to significant losses. In Telstra's case it has led to a handful of acquisitions including the 2004 purchase of the classifieds publisher Trading Post for $636 million.
According to a report in the Australian Financial Review, this acquisition looks set to have been a grave mistake with the newspaper reporting that the telco is in negotiations to sell the business for just $10 million.
That's a big haircut!
While the Trading Post has presumably provided profits to Telstra over the 11 years of ownership, they have obviously been declining with the overall value of the business vastly diminished. It's a reminder to investors that even the 'big guys' get things wrong and major strategic changes, or attempts to grow by acquisition need to be viewed with scepticism. On the flip side, the positive aspect of investing in blue-chips like Telstra is that they can survive these kinds of losses.
