"Should I buy Telstra Corporation Ltd (ASX: TLS) shares at this share price?"
Or, "Are Telstra shares a good buy?"
That's two questions any Australian investor is asking every day — especially in this uber-low interest rate economy.
After all, in spite of the measly interest rates, Telstra shares are expected to offer:
- A high yield – in the form of a BIG fully franked dividend; and
- Modest growth – although it isn't a gangbusters growth stock, Telstra's profits are expected to tick along nicely in the coming three years; and
- Relative safety – compared to many other blue chips, Telstra is perceived to offer superior reliability. The banks are facing headwinds. Miners are dust. And who knows what the two supermarkets are up to.
While risks always persist for every sharemarket investment, I think it's fair to say Telstra Corporation Ltd shares are head and shoulders above many others blue-chip dividend shares included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
For comparison, the Telstra Corporation Ltd share price is up 90% in five years while the S&P/ASX 200 is down 2%. Now, past returns are no guarantee of future returns. We all know that much. But if you chuck in Telstra's oh-so-juicy fully franked dividend yield, Telstra's historical share price returns are even more compelling.
"So" I hear you ask, "Are Telstra shares a buy?"
The answer: It depends.
Personally, I think Telstra shares are up there as being some of the best income shares on the ASX. However, as always, investors need to focus on the risk-adjusted returns.
And given the uncertainty in any sharemarket investment – yes, even from Telstra shares – it's vital you buy in with a healthy margin of safety.
For example, if we guesstimated that Telstra shares are worth, say, $5.50, then the current Telstra share price of $5.43 (shares are down 3% at the time of writing) doesn't leave much room for error.
Indeed, the safety margin between what we think they're worth ($5.50) and what we can buy them for ($5.43) is only 7 cents or 1.2% of what we believe is the 'fair' or 'intrinsic' worth of Telstra shares.
"So at what price should I buy Telstra shares?"
The answer: It depends.
If your goal is to not only receive Telstra's generous fully franked dividends, but also to outperform the share market, I'd say a margin of safety of 30% or more would be great. But the chance of Telstra's share price falling a whopping 30% below fair value is unlikely.
Nonetheless, I think any share price materially below $5 could be a fair price to pay for Telstra.
Until then, there are plenty of other dividend shares worth buying.
