If you sell Telstra Corporation Ltd now, you might regret it

Credit: Olivia Wilson

Over the last five years Telstra Corporation Ltd (ASX TLS) has risen by 86% versus 12% for the ASX. Therefore, many investors may be questioning whether Telstra is set to run out of steam in the future, as has been the case with blue-chips such as Suncorp Group Ltd (ASX: SUN), which has seen its share price come under pressure in the last year following growth.

However, Telstra continues to report robust growth figures in its key domestic market. In the first half of the current year its total number of retail broadband customers rose by 121,000, while retail mobile customers increased by 235,000.

This shows that while Telstra is a dominant player in the industry, it still offers upbeat growth figures. And with demand for data increasing rapidly, Telstra continues to have a major growth opportunity in my view.

Outside of Australia, Telstra has significant growth opportunities even though it recently reduced its stake in Chinese online business Autohome. Telstra will net US$1.6 billion for the deal and while some investors have called for it to be used to repay debt rather than fund a share buyback programme, Telstra’s net debt to equity ratio of 98% is not excessive in my view, given the company’s resilient business model.

Further, Telstra’s cash flow indicates that its current levels of leverage are very affordable. Free cash flow has averaged over $4 billion per annum over the last two years. Interest payments on debt in the last two years have amounted to less than $1 billion in both years.

Such impressive free cash flow will allow Telstra to continue to invest in new markets such as healthcare. With companies such as Ramsay Health Care Limited (ASX: RHC) enjoying stable growth, Telstra’s move into the provision of primary healthcare, health analytics and aged care could provide a rapidly rising revenue stream as well as a more robust earnings growth profile. And with Telstra recently being awarded a three-year contract worth $180 million to manage a cancer screening register, its growth outlook remains upbeat.

However, the real opportunity for Telstra is, in my view, its expansion abroad.

For example, Telstra has numerous key projects in Asia including the rollout of a fibre optic backhaul link which will provide connectivity between the US and Japan, as well as other nations in the region. This could act as a positive catalyst on Telstra’s sales and earnings and with the company targeting a third of revenue to be generated from Asia-Pacific by 2020, it seems clear that Telstra’s outperformance of the ASX in the last five years could continue.

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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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