4 reasons to buy Telstra Corporation Ltd shares

Here's why Telstra Corporation Ltd (ASX:TLS) is worth adding to your portfolio.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With a slowing China, falling commodity prices and an uncertain global economic outlook, it is little wonder that the ASX has been so volatile in 2016. In fact, the index has now fallen by 6% since the turn of the year and, even though the Chinese index closed up on Friday, the ASX still dropped by another 0.5%.

Looking ahead, more falls could be on the cards in the short run as oversupply in the commodities market is showing little sign of change and China's transition towards a consumer-led economy is likely to remain painful in the short run at least. Therefore owning relatively defensive stocks which offer a high level of income and upbeat long term growth prospects at a fair price could prove to be a sound move.

On this front, Telstra Corporation Ltd (ASX: TLS) has huge appeal. For example, it has a beta of just 0.5 and this means that its share price should move by around half as much as the wider index's level in the short run. As a result, Telstra's shares may not fall by as much as the ASX in a bear market, thereby helping to protect investors' capital.

In addition, Telstra is becoming an increasingly diversified business which should provide its sales and earnings with greater resilience over the medium to long term. For example, Telstra not only has a dominant position in the domestic mobile market, but has also expanded into e-healthcare and this space could prove to be less positively correlated to the macroeconomic outlook than is the case for most industries.

As well as defensive appeal, Telstra also offers long-term growth potential. For example, it is seeking to generate a third of its sales from Asia by 2020. Although this may seem rather foolhardy with the Chinese economy slowing down and causing fear among investors, the world's second-largest economy offers tremendous growth potential in the longer term.

That's because of rising wealth, with 326m Chinese expected to become middle income earners between 2014 and 2030. As such, consumer products sales are likely to increase at a rapid rate and by pivoting to Asia, Telstra can tap into this growth space.

While the Aussie economy is performing relatively well, as evidenced by upbeat GDP growth figures from the September quarter, the prospects for an interest rate rise by the RBA seem to be fading due to the high degree of uncertainty regarding the short to medium term Chinese economic outlook. As such, Telstra's fully franked yield of 5.9% could continue to hold great appeal – especially since it is 110 basis points higher than the ASX's yield. With dividends forecast to rise by 3.2% next year, Telstra also offers a real-terms rise in income, too.

As well as income prospects, long term growth potential and a defensive business model, Telstra also offers fair value for money. This is evidenced by its price to earnings (P/E) ratio of 15.2 being below the ASX's P/E ratio of 15.7 and the telecoms sector's P/E ratio of 16.1, thereby indicating that an upward rerating is on the cards.

Motley Fool contributor Peter Stephens has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »