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Would Warren Buffett buy Telstra shares?

One of the most successful investors in history is Berkshire Hathaway’s Warren Buffett.

At the last count the legendary investor had amassed a fortune of US$82.6 billion according to Forbes.

In order to get there Mr Buffett has invested wisely and with a long-term view.

While amassing a similar fortune may be difficult, I believe regular investors can create significant wealth by following his investing principles.

Four key principles that Buffett follows are listed below. I’ve used these principles to see if Telstra Corporation Ltd (ASX: TLS) would be a share that he would invest in. Here’s what I found:

Buffett invests in companies that he can understand.

Although it has many different segments and revenue generators, Telstra is quite a simple business to understand. So I think this would get a tick, especially given how he has previously invested in U.S. telecommunications company Level 3 Communications.

Buffett looks for companies with a durable competitive advantage.

Ten years ago I think you would’ve given Telstra a tick here as well, but other than having the best mobile network and deepest pockets, Telstra’s competitive advantage has lessened over the last decade. In addition to this, competition between Telstra and the likes of Amaysim Australia Ltd (ASX: AYS), TPG Telecom Ltd (ASX: TPM) and Vocus Group Ltd (ASX: VOC) has intensified since the launch of the NBN levelled the playing field somewhat.

Management must be talented and have integrity.

Although Telstra’s CEO Andy Penn has been criticised over the past few years, I’m not sure anybody else would have done things significantly better. So, I’d be willing to give Telstra a tick here.

Don’t overpay for shares.

Telstra’s shares may be trading at just 14x estimated forward earnings, but I wouldn’t necessarily say that is cheap. The next few years look likely to be very challenging for Telstra and I would not be surprised to see earnings decline further before they get better. And with its dividend looking likely to be cut this year, I think they could slide lower from here.

Conclusion.

I don’t think Warren Buffett would buy Telstra shares at the current level due to its lack of a durable competitive advantage and the current share price not offering a compelling enough risk/reward.

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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. The Motley Fool Australia has recommended TPG Telecom Limited and Vocus Communications 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 Scott Phillips.