2 ways the Telstra share price could soar back over $6

Source: Telstra presentation

The Telstra Corporation Ltd (ASX: TLS) share price could creep back to its 52-week high of $6.53 if a number of events play out.

Australia’s largest telecommunications group recently sold a 47.7% stake in the Chinese online automotive classifieds business Autohome, reaping proceeds of US$1.6 billion (A$2.1 billion). Telstra still retains a small 6.5% interest in Autohome.

Existing shareholders might be licking their lips at the prospect of Telstra conducting a buyback of its shares – something the company has done before. In August 2014, Telstra announced a $1 billion off-market buyback when the shares were at $5.60 – slightly above today’s price of around $5.45. that makes a buyback more attractive at today’s prices, with the share price lower than it was in 2014.

A special dividend or a higher dividend appears unlikely given Telstra’s lack of franking credits available.

The other factor that points to a share buyback is the lack of available investment options for the telco. Telstra appears to have taken a disciplined approach to acquisitions, recently backing away from a joint venture in the Philippines. The telco is so dominant in Australia that unless it makes an acquisition outside the telecommunications sector or outside Australia, the competition regulator is likely to take a dim view.

With $2.2 billion of cash on its balance sheet already at the end of December 2015, Telstra will book proceeds of around A$1.8 billion in the current half year, giving it plenty of firepower.

Telstra has a good recent track record of rewarding shareholders when it can, so if it can’t find any high quality investments, the chances of another buyback increase dramatically. However, a number of fund managers would prefer the telco to reinvest the funds back into its business (perhaps to rectify the recent mobile network outages?), or pay down debt.

With $17.4 billion worth of debt on its books, paying down some of that would cut interest costs, and provide a boost to earnings per share (all else being equal).

Foolish takeaway

Telstra regularly takes some stick from fund managers concerned about its long term growth, but shareholders don’t have much to complain about. Over the past 10 years, shareholders who have reinvested their dividends have gone close to doubling their money – a similar return to Commonwealth Bank of Australia (ASX: CBA), and a much better result than Woolworths Limited (ASX: WOW), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB).

That goes to show the importance of dividends, and the power of compounding.

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Motley Fool writer/analyst Mike King owns shares in Telstra Corporation and Woolworths. You can follow Mike on Twitter @TMFKinga

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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