Is Telstra Corporation Ltd the perfect investment for financial year 2017?

Source: Telstra presentation

Telstra Corporation Ltd (ASX: TLS) has risen by over 3% since Brexit, while the ASX has fallen by 1%. This indicates that the market continues to view Telstra as a defensive stock and this characteristic could be of major benefit to the company and its investors in 2016.

That’s because 2016 looks set to be one of the most volatile years for quite some time for the ASX. Sure, the days following Brexit have seen shares behave in an exceptionally volatile manner, but even before 24 June the ASX had already experienced a tumultuous year.

There was fear surrounding US interest rate rises and their potential impact on global economic growth. Further, the slowdown in China’s growth rate also hurt the ASX since a number of its constituents are reliant upon China’s demand for iron ore and other commodities.

Both of these challenges have not fully subsided, but have merely moved into the background. The US is still likely to raise interest rates in the coming months and the Chinese growth rate may fall further as it refocuses as a consumer goods economy.

All of this could be good news for Telstra. Its defensive profile could be seen as important for investors who are likely to continue to place the return of capital ahead of a return on capital over the short to medium term.

Sure, it could be argued that Telstra’s overall performance in 2016 has been disappointing. The ASX has fallen by 1% and Telstra has managed just 0.5% superior performance.

However, where Telstra has added value is with regards to its total return, which includes dividends. For instance, Telstra currently yields 5.6% and in a volatile market this could prove to be appealing. Not only do high yields improve total returns, they also provide cash flow which can then be used to purchase attractive opportunities which may be on offer.

As well as a sound income and defensive reputation among investors, Telstra may also be an excellent stock to own in 2016 because of its strategy and growth potential.

For instance, it is on track with its current productivity programme and in the first half of the current financial year it reduced fixed costs by $40 million (1.1%), while its acquisition of Pacnet provides clear evidence of Telstra’s ambitious international growth strategy.

As someone who is bullish on the potential in the emerging world and on the Asian economy in particular, I think that Telstra’s expansion into that region (including its joint venture in Indonesia) highlights its long-term earnings growth potential.

Therefore, in my view Telstra may prove to be a sound stock to own this year as volatility in world markets is likely to remain high. But it could also prove to be a great stock to own in future years, too, as its combination of cost-cutting and growth from expansion into new markets really starts to take hold.

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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. 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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