3 reasons Telstra Corporation Ltd shares could move higher

Credit: Telstra

Telstra Corporation Ltd’s (ASX: TLS) share price performance in 2016 has been somewhat disappointing. It is up by 2.5%, which is the same amount as the ASX, while other blue-chips such as Suncorp Group Ltd (ASX: SUN) have risen by over 6%. However, I believe that there is better performance ahead for Telstra’s investors for these three key reasons.

Healthcare expansion

Since it launched Telstra Health in 2014, Telstra is no longer a pure play telecoms company. This provides it with greater diversification which in my view could lead to an increase in its intrinsic value as its risk profile and discount rate is lowered.

Further, Telstra is leveraging its existing strengths in connectivity to create new solutions in the healthcare space which I believe could act as a positive catalyst on its earnings and share price. Telstra has quickly gained a foothold in the ehealthcare space thanks to an M&A programme which has included analytics firm Dr Foster, aged care software vendor iCare Health and hospital software vendor Emerging Systems. This ‘buying in’ of growth should mean that Telstra’s investment payback period in ehealthcare is reduced somewhat and that the division has a greater impact on Telstra’s bottom line.

Additionally, those three acquisitions themselves have huge potential in my opinion to benefit from a demographic tailwind. People are living longer and technology is becoming an increasingly important part of all of our lives. Therefore, they and Telstra’s other investments in ehealthcare could produce a favourable growth curve for the company.

Asia expansion

I’m also upbeat about Telstra’s prospects due to its expansion into Asia. I think that its three pillar strategy in Asia makes sense and I feel that its M&A programme is allowing Telstra’s Asian operations to have a faster impact on its bottom line than a comparable organic growth strategy would.

For example, Telstra’s deal to buy Pacnet in 2015 as well as its joint venture with Telkom Indonesia in the same year provide the company with entry into fast-growing markets in Asia. In Pacnet’s case it doubled Telstra’s customer numbers in Asia and greatly increased its network reach and data centre capabilities. Telstra also has the largest subsea cable network in Asia Pacific and this could act as a platform through which Telstra is able to build greater exposure to a lucrative regional economy.

In fact, the IMF predicts that the Asian economy will grow by 5.3% in 2016/17. I feel Telstra’s aim to generate a third of its sales from there by 2020 is a sound goal.

Dividend growth

In my view, Telstra’s moves into healthcare and the Asia economy will help to boost dividends. With interest rates being low and there being the possibility of a continued dovish stance by the RBA, Telstra’s yield of 5.4% could hold real appeal to income-seeking investors.

Further, Telstra’s dividend coverage ratio is sufficiently high to provide real opportunity for dividends to grow by at least as much as earnings over the long run. For example, Telstra’s dividend coverage ratio was 1.3 in FY 2016, which indicates that there is sufficient headroom to offer a substantial real-terms rise in dividends in the future.

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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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