With low-interest rates around the world persisting – and in Australia's case likely to go lower, investors continue to hunt for reasonable yields.
Australia's largest telco Telstra Corporation Ltd (ASX: TLS) has been one of the go-to stocks, thanks to its rock solid fully franked dividend, and yield of more than 5%. With the share price hitting 13-year highs of $6.74, the yield has now fallen below the 5% level but remains attractive at 4.6%.
The key concern though is that the giant telco has struggled to materially grow earnings per share (EPS) over the past few years. In 2009, Telstra generated 32.9 cents in EPS, while in 2013 EPS was just 30.6 cents. Last year saw a significant jump in EPS to 38 cents, driven mostly by a significant drop in costs.
This year could be more of the same as CEO David Thodey drives more efficiency gains, sells off unprofitable divisions, such as last year's sale of a 70% stake in directory business Sensis to private equity firm Platinum Equity for $454 million, and smaller divisions drive large increases in growth, contributing more to overall results.
With Telstra likely to play a larger part in the rollout of the National Broadband Network (NBN), as well as ongoing maintenance and support of the underlying infrastructure going forward, the telco may well surprise investors with its results over the next few years.
There are plenty of positives for Telstra. Its mobile network is second-to-none, despite moves by competitors Optus – owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT) and Vodafone – partly owned by Hutchison Telecommunications (Aus) Ltd (ASX: HTA) to ramp up their 4G mobile offerings.
Mobile and fixed data traffic is expected to rise dramatically over the next few years, as we highlighted in this article last week, with Telstra well situated to participate in that, along with all the associated products and services such as cloud hosting, support, and maintenance.
Telstra also holds a 56.7% in Autohome, China's largest listed car sales website, and is slowly expanding its Asian presence. In December 2014, the company announced the acquisition of Asian telecoms company Pacnet for US$697 million, giving Telstra a network of 29 interconnected data centres in 17 cities across the Asia Pacific region and Asia's largest privately-owned submarine cable network.
Don't be surprised if Telstra beats analyst estimates when it reports later this week – or if the telco lifts its dividend.
