Is Telstra Corporation Ltd a good company for new investors?

Credit: Olivia Wilson

It’s intimidating buying your first shares in a company.

You probably worked your ass off to get the money to invest, so the last thing you want is to see it evaporate into the ether.

When it comes to starting out, companies with easy to understand businesses and growing earnings generally have a lower risk profile than young upstarts. Dividends are also a good way to get into the habit of compounding your returns.

Telstra Corporation Ltd (ASX: TLS) is one of the most established companies around. Is it a good buy for beginner investors?

A visible business…

To start, it helps that Telstra is a big, visible company with a consumer division. Companies with a focus on consumer sales can be great starting points because you probably understand how the business works already.

For example you could very easily explain to your kids how Telstra makes money. The same goes for companies like Woolworths Limited (ASX: WOW) or Coca-Cola Amatil Ltd (ASX: CCL) – they are both highly visible and you probably grew up knowing their names.

Telstra is made up of several different parts, but at its core is a huge retail communications arm which provides mobile and fixed broadband services for consumers and businesses. It also has network infrastructure and supporting services which are all pretty easy to grasp.

…but slowing earnings

Companies with positive, growing earnings histories usually have an established customer base and growing demand. It also makes it easier to form a view of the company’s value.

Telstra rakes in tens of billions of dollars every year in revenues from its services and this has crept up slowly over the last three years. Unfortunately, costs have also been creeping up and the company’s earnings before interest and income tax (EBIT) have drifted lower as a result.

Going forward these earnings could come under more pressure as the completion of the NBN means lower earnings, which is a risk to the share price.

What about dividends?

One of Telstra’s great appeals is the distribution of its cash earnings to shareholders.

Without any near term growth prospects it makes sense for the company to pay the cash out and I’m a believer that dividends are great if you’re just getting started with investing.

Until those dividends hit your account the investing process can all feel a bit surreal. Dividends are tangible feedback which makes you consciously think about the next step in the investing process – compounding.

Foolish takeaway

Telstra has a couple of great characteristics for investors starting out their journey, especially being well known and paying out an attractive dividend from a strong base of earnings. However it’s important to realise that if earnings decline in the years ahead, the company’s share price may drift lower in turn.

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Motley Fool contributor Regan Pearson 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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