Should you buy shares in Telstra Corporation Ltd?

Credit: Olivia Wilson

Shares of Australia’s largest telecommunications provider, Telstra Corporation Ltd (ASX: TLS) have been on the nose with many investors, falling 23% since hitting a post-GFC high in February last year. The stock rebounded in August, posting its current 52 week high of $6.53, but has been dragged down once again amidst ongoing share market volatility and worries of slowing growth.

Despite those concerns, I believe Telstra is still the preferred name in telecommunications and that the current downturn in share price is unwarranted given its most recent set of results. Accordingly, here is why I think Telstra remains a buy today.

Half-year results

Telstra revealed its 2016 first-half results in February, reporting an increase to total income of 9.1% to $14.2 billion. The telecommunications behemoth increased net profit after tax by 0.8% to $2.1 billion and earnings per share by 1.8% to 17.2 cents per share (which is no ordinary feat for a company of its size). Impressively, Telstra achieved income growth across all segments, driven by new customer acquisitions across all of its retail businesses. This allowed Telstra to reaffirm full year guidance of mid-single digit income growth and low-single digit EBITDA growth – a positive outcome in current market conditions.

Slowing growth

One of the possible reasons for Telstra’s share price decline may be the fact that it is not growing as fast as its competitors are. One could be forgiven for seeing this given industry rivals TPG Telecom Limited (ASX: TPM) and Vocus Communications Limited (ASX: VOC) grew earnings (EBITDA) at 33% and 49% respectively in their latest financial results. However, one of the telling figures from Telstra’s half-year results was that it added 235,000 customers to its domestic mobile business.

Telstra’s total mobile customer base now sits at 16.9 million, which compares to Australia’s population of approximately 23.1 million, implying that it services almost three-quarters of Australia’s population (if we assumed that each person only had one mobile device). Importantly, this figure dominates TPG and Vocus which have approximately 320,000 and 173,000 total mobile customers respectively, indicating that Telstra still outgrows its competitors on an absolute numbers basis. Therefore, the “slowing growth” appears to be a side-effect of Telstra’s size, rather than an inherent problem with the business.

Dividend yield

The decline in share price has also meant that Telstra’s ‘holy’ dividend is worth even more to shareholders. Although the stock now trades on an ex-dividend basis, Telstra increased its interim dividend by 0.5 cents to 15.5 cents, fully-franked. Assuming management maintains last year’s final dividend of 15.5 cents, which should be easy given free cash flow is expected to be between $4.6 billion and $5.1 billion for the year, Telstra trades on a trailing dividend yield of 6% at current prices. This yield jumps to 8.6% when franking credits are included, easily outperforming the Reserve Bank of Australia’s official cash rate of 2% (which is expected to decline further if the Australian dollar continues higher!.

Foolish takeaway

Whilst Telstra is unlikely going to grow as ‘fast’ as fellow competitors Amaysim Australia Ltd (ASX: AYS), TPG and the reinvigorated Vocus group, it continues to perform well against industry stalwarts Vodafone (which is 50% owned by Hutchinson Telecommunications (Aus) Ltd (ASX:HTA)) and Optus (owned by SingTel Optus Pty Ltd). Therefore, I believe Telstra’s defensive characteristics as a utility, alongside its coveted dividend yield should see its share price regain support in coming months, making now a great time to buy a stock that belongs in everyone’s portfolio.

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Motley Fool contributor Rachit Dudhwala owns shares of Telstra Limited. 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.

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