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Top broker adds Telstra Corporation Ltd shares to its conviction buy list

The Telstra Corporation Ltd (ASX: TLS) share price has edged higher this morning and currently sits at $3.63 at the time of writing.

But one leading broker believes it could climb significantly higher from here.

According to a note out of Goldman Sachs, the broker has placed the telco giant on its conviction buy list. Furthermore, its analysts have placed a price target of $4.33 on its shares, implying potential upside of 19%.

This increases to a total potential return of over 25% if you factor in its proposed FY 2018 dividend of 22 cents per share.

Why is Goldman bullish on Telstra?

Goldman believes that Telstra is a buy due largely to the long-term earnings growth potential provided by its dominant mobile network and the significant opportunity it has to reduce costs through the digitalisation and simplification of its business.

Although competition is heating up in the industry due to the launch of the TPG Telecom Ltd (ASX: TPM) mobile network, the broker believes that investors have been overly negative on Telstra’s mobile earnings outlook.

Due to its dominant network, vast scale, and position as the premium player, its analysts think Telstra will be able to navigate the increasingly competitive mobile market.

This should be complemented by significant cost savings according to the broker. After all, Telstra’s workforce is disproportionately large compared to its peers and its labour productivity has plenty of room for improvement.

The company is targeting $1.5 billion in cost outs by FY 2022 and Goldman appears confident that it can achieve this.

What about the dividend?

The good news here is that the broker believes that Telstra’s proposed 22 cents per share dividend is sustainable post the NBN migration.

With Telstra rapidly accumulating franking credits, its analysts expect that buybacks will be announced and used to support the dividend, allowing it to maintain its dividend without putting pressure on its balance sheet.

On a side note, the broker also likes telco peer Amaysim Australia Ltd (ASX: AYS) and believes its dividend has significant room to grow over the coming years. As a result, it has placed a buy rating on its shares.

Overall, I would have to agree with Goldman Sachs on this one and think investors ought to consider Telstra as a buy.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom Limited. 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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