MENU

4 reasons to buy Telstra Corporation Ltd shares

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.

Despite this, there are 3 other ASX stocks that could outperform Telstra.

In fact, they have recently been named as The Motley Fool's 3 Top Blue-Chips For 2016 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about them.

Click here to do so – it's completely free and comes without any obligation.

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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!